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Author: 

Frost,  Thomas  Gold 


Title: 


A  treatise  on  the 
incorporation  and 

Place: 

Boston 

Date: 

1906 


MASTER  NEOATIVE  # 


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^92;:      Frost,  Thomas  Gold. 

A  treatise  on  the  incorporation  and  organization  6f  cor- 
porations created  nnder  the  business  corporation  acts'' 
of  the  several  states  and  territories  of  the  United  States, 
by  Thomas  Gtold  Frost  ...  Boston,  Little,  Brown,  and 
company,  1906. 

3  p.  1.,  ix-xv,  685  p.  24^*". 

This  volume  is  only  a  portion  of  a  complete  handbook  of  the  law  of  or- 
ganization and  incofporation  of  corporations,  cf.  Ptd>lislM»y  note. 


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COKPORATIOIsrS 

CBEATED  UNDER  THE  "BUSINESS  CORPORATION  ACTS" 
OF  TH£  SEVERAL  STATES  AND  TSBBirOSISS 
OF  THE  UNITED  STATES 


BY 

THOMAS  GOLD  FROST,  LL.D.,  Ph.D. 

OF  THB  JfBW  YORK  BAM 

Axmmm  om  **TBaATisB  mr  Gvabaiitt  Ihsitxavob,''  "Tm  FsnrcB 

ComxiTunov  ow  1793^"  m. 


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LITTLE,  BROWN,  AND  COMPANY 

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TO 

JOHN  B.  BROWN,  £s<|. 

OF  THB  ILLINOIS  BAB 
THIS  WOBK  IB  DSM0ATB9  BT  HIS  FBIEin>,  OOLLBOB  CIUkSSMATB 

ABD  FIB8T  LAW  PABTIPB 

THE  AUTBOS 


PUBLISHERS'  NOTE 


Wb  beg  to  call  the  attention  of  the  purchasers  of  this  book 
to  ttie  fact  that  it  is  only  a  portion  of  a  complete  handbook 
of  the  Law  of  Organization  and  Incorporation  of  Corpora- 
tions. Beferencea  in  the  notes  to  the  omitted  parts  may  be 
found  in  the  complete  work. 

Part  n.  contains  a  Synopsis  Digest  of  the  Corporation 
Laws  of  ihB  Several  States  and  Territories  of  the  United 
States.   Part  III.  contains  Forms  and  Precedents. 


I 


1 


PREFACE 

i 

The  present  work  might  with  no  inoonsidemble  degree  of  fitness 
haye  been  entitled  "  A  Treatise  on  Comparattve  Incorporatian 

Law  in  the  Several  Commonwealths  of  the  United  States."  Such 
a  work  if  properly  prepared  should  not  fail  to  interest  the  active 
practiti<xDer  as  well  as  the  pnblic  at  large.   One  of  the  greatest 
^  difficulties  met  with  in  the  preparation  of  the  volnme  here  pre- 

sented, has  been  to  successfully  condense  the  subject  matter  thereof 
without  eliminating  any  matters  of  real  importance.  If,  in  place 
of  the  customary  copious  references  so  freely  offered  in  support 
of  principles  of  corporation  law  .universally  considered  to  be 
'  sound,  the  reader  finds  only  a  single  citation,  he  may  rest  assured 

I  that  careful  investagation  has  satisfied  the  author  that  it  repre- 

I  sents  the  prevailing  doctrine  relative  to  the  particular  proposition 

j  in  support  of  which  it  has  been  cited.  This  method,  it  is  believed, 

will  meet  with  favor  at  the  hands  of  the  profession  for  the  follow- 
ing reasons : 

The  vast  majority  of  the  decisions  of  the  courts  of  this  country 
I  rendered  prior  to  1870,  in  so  far  as  they  relate  to  questions  of 

,  corporation  law,  are  for  ibe  most  part  a  veritable  l^^al  ^  junk- 

I  shop"  representing  either  what  is  now  "horn-book  law,"  or  else 

overruled  cases.  Many  of  these  contain  enunciation  of  principles 
of  corporation  law  the  soundness  ol  which  no  one  in  these  days 
would  Tentore  to  dispute,  or  else  they  represent  propocdtions  of 
law  which  are  no  longer  regarded  as  sound.  The  corporation 
law  of  to-day,  by  engrafting  into  its  subject  matter  accepted  prin- 
c^les  of  agency  and  estoppel,  has  assumed  a  form  which  the 
corporation  lawyer  of  fifty  years  ago  would  find  great  difficulty  in 
recognizing. 


X 


PREFACE. 


In  the  preparation  of  this  work  utility  and  accuracy  have  been 
kept  odDStantly  in  mind.  The  writer  has  made  free  use  of  certain 
exceptlmial  focilities  that  have  been  open  to  him  through  his 
professional  connections,  including  access  to  a  large  number  of 
fonns  as  well  as  a  great  deal  of  correspondence  with  state  officials 
in  the  mious  commonwealths.  The  forms  for  drawing  charters 
in  the  various  states,  while  prepared  by  ibe  author,  have  also 
been  approved  in  every  instance  by  competent  attorneys  who 
reside  in  the  state  under  the  laws  of  which  the  draft  of  the 
charter  was  mad& 

All  of  this  has  been,  it  is  hoped,  to  the  advantage  of  the  pro- 
fession and  the  public  at  large. 

THOMAS  GOLD  FBOST 

•  71  WuMMM  Bnmmt,  »«w  Yobk  Cifx,  N.  Y. 
D>wtir  1,  1104. 


TABLE  OF  CONTENTS, 


Introduction  ..••..•••«•  1 


PART  I. 

INCOfiFORATlON  AND  ORGANIZATION  OF 

COBPOBATIONS. 

CHAPTER  L 

HitArTINa  THE  CHARTBB. 


§   1.   General  Remarks  on  Corporate  Charters  ,  ,  9 

§    2.    Incorporators     .                                                    .    .    •    .  12 

§    3.    Corporate  Name   14 

§    4.    Corporate  Purposes   15 

§    5.    Number  of  Corporate  Purposes  permitted   19 

§    6.  Collateral  Attack  upon  Corporate  Purposes  and  Powers    ...  21 

§   7.  Effect  of  Inserting  Illegal  Purposes  28 

§   8.  Coi-porato  Powers,  Classification  of   ...    .    .   •   ,   •   .   ,  29 

§   9.  Common  Law  I'owers,  Definition  of ;  Enumeration  of  ...   .  80 

§  10.   Right  to  a  Corporate  Name   31 

§'11.   Right  of  Perpetual  Succession  .   .   .  ■   31 

$  12.  Right  to  adopt  and  use  a  Corporate  Seal   32 

§  18.  Power  to  Mquire,  hold,  and  dispose  of  Real  and  Penonal  Property  32 

S  14.  Power  to  appoint  Corporate  Offioers  and  Agento   88 

§  15.  Powmr  to  esteblish  By-Laws   88 

§  16.   Power  to  sne  and  be  sned  •   .   .   .   •  84 

§  17.   Express  Powers,  l>efinition  1^ ;  Enumeration  of   84 

§18.  Power  of  Corporations  to  purchase  their  own  Stoek     ....  86 
§  19.  Power  to  subscribe  for,  porchase,  and  hold  Stock  in  oHier  Cor- 
porations  87 

§  20.    Power  to  consolidate  with  other  Corporations   88 

§  21.  Power  to  transact  all  or  any  Part  of  the  Corporate  Bttsinesa  oat- 
side  of  the  State  of  its  Domicile   38 

§  22.  Power  to  perform  Constituent  Acts  outside  of  the  Domiciliary  State  40 

§  23.  Power  to  extend  Corporate  Existence  40 

§  24.    Power  to  change  the  Corporate  Name   41 

§  25.   Power  to  increase  or  decrease  Capital  Stock   41 

$  26.   Power  to  issue  Preferred  Stock   41 


» 

^  TABLE  OP  COHTBHTB. 

  4tj 

§2T.  Ptoiwr  to  cfcM^etlKJ  Corporate  Purposes  

i2&  Power  to  diMge  Number  of  Directors   .    .    •    •   ;   :    '    '  1 

I  S  pSlsr  to  ^  tt-  Corporis  Domicile  and  Pnnciral  Place  of 

I  80.  pSSTacquir;  and'enfor'ce  'a  Lie^  upon  Stock  to  secure  the 
Rifment  erf  Debts  Due  the  Corporation    .    ...    *    '    *  * 

I  St   PowITT  levy  Assessments  against  the  Stockholder  with  the 

Bight  to  forfeit  their  Stock  for  Non-payment  thereof     .    .    •  « 

182.   Po^Sr  to  authorize  Voting  by  Proxy  at  Stockho^^^  f 

§33    Power  to  permit  Cumulative  Voting  in  the  FJectiooerf^^  .48 
,  I        Power  to  issue  Stock  as  full  paid  io  Exchange  for 

Services  '    'a-.!*,  *  Rl 

I  35.  Power  to  dispose  of  Corporate  AmU  m  "^^S-^'k^^^ 
,M.  Power  to  voLtarUydi»«l»ett.CoT?<«rtl«wW«»Itoco«m  ^ 

,!rr.  p!;er'.o^i::^^vti;(i-;t.;p^i^ 

'  the  Intemd  AfciM  Cotpontion  

J  38.  Power  to 

§  39.  Power  to  anUiorae  Appointtnon*  «  woumt  ^ 

the  Board  ol  IMreeton  •  

i  40.  Ptowor  to  enhrgo  or  dinnnish  Corporate  Powen  

I  11  Power  to  ehaase  P*r  Value  of  Shares  .... 

5Jk  ST^  SCholders  to  vote    Election  of  B.rector3.   •   •   •  « 

I  48.  PMwr  to  etasify  Directors  m 
144.  P»w  to  .mend  Articles  before  Organmtion     .  ..... 

I  46.  PWer  to  .nrrender  Charter  before  O^f "«'"7  '  j  iLi; 

R>wer  given  to  Minority  StockhoWers  to  compel  PonA-ecfS-lr  ^ 

UoldiiiL'S  "lioii  CoMSoliiliilioii     •••*..**, nt 
I  47.  Incidental  Powers,  Definition  and  En«B«.tiMi  ol  .   .   •   •  • 
§48.  Power  to  make  Contracts  60 

S  49    Power  to  borrow  Money  .    .    •   •  '\  .JjJ   '    '  60 

I  50    Power  to  give  and  accept  Cartom«7BpdMH«rfU*t.    .   .  «« 

I  61.   Power  to  Lvtgage  and  pledge  M«HlP»«0Drift«P««3r  •   •  60 

§  52.  Power  of  Amotion  •  •  '  *  * .  61 
§53.   The  Modern  Doctrine  (rf  Ultra  Vlree  65 

§  54.   Corporate  Domicile   67 

§  55.   Board  of  Management  !   !   !   !   .  67 

§  56.  Capital  Stodt  '  '  *  1  i  rt'  '\^\QiLjk  69 
§57    linrftationsnponABioai^  of  Capital  Sfcoek  .... 

I  5&  Pte  Value  <rf  Capital  Stock  

§  50.  Awomiiof  Stock  Subscriptions  72 

\1  ^tff!:::t^^l^l^>chaCor^ration-n.;yWin.B---  « 

I  02.  Doration  of  Corporate  Existence  \       .  74 

183.  Date  of  Annual  Meeting     •    •    * '   '  74 

I  64  Limitation  upon  Corporate  Indebtedness    .  ^  .    •    •  • 

ies:  Exemption  of  Stockholders  from  Personal  laahdity     .    .    '    '  ]l 

I  66.    Adoption  of  By-Laws      ^J'^^^T^  ol  Ao  Coi- 

I  67.   Provisions  for  the  Regulation  ci      Internal  AMi»  «  «•  ^ 

poratiou  


TABLE  OF  CONTENTS. 

§  68.  Miscellaneous  Phmsiona  relatiTO  to  Contents  of  Articks  of  Jfe-  ^ 

corporation  

§  69.   Construction  of  Charter  77 

CHAFTfiR  n. 

PBOCUBIMO  THE  COARTBB. 

8  70.   Signing  ttw  Artides  

§  71.  Acknowledgment  of  Earaention  of  Articles  70 

8  72.  Pnblicalion  of  Aftides   .... 

8  78.  Affidavit  as  to  Stodt  Solieeripaons  

§  74.   Anti-Trust  Affidavit  81 

§  75.  Special  Requirements  in  Particular  States  81 

8  76.  Powers  of  State  Officials  lelatife  to  accepting  or  reieetiag 

Articles   aa 

§  77.  Right  to  Mandamus  State  Officials  for  refusing  to  lis  Artielse  .  81 

§  78.  Organization  Tax   g| 

§  79.  Form  in  which  Charter  is  granted     ,  ,    .  m 

§  80.  Filing  and  recording  in  Local  County  Offices  

§81.  Distinction  between  rfeywrc  and  ^c/ac/o  Corporations  ....  87 

8  82.  Right  of  Parties  other  than  the  State  .to  ooUateraUj  impeaeii 

Corporate  Existence   gg 

8  83.   Bight  of  State  to  attack  Corporate  Existence  in  Direct  Pko- 

oeedings  ^ 

8  84.  Wben  does  Corporate  Existence  commence  ?  m 

CHAPTER  IIL 

OKOAHIZATIOir  0»  OORPORATIOIIS  AFTSB  ITOORPORATION. 

§'  85.  The  Incorporators'  Organization  Mee^g  ' ,  .  ^ 

§  86.  Organization  Meeting,  how  called     .»   gg 

§  87.  Organization  Meeting,  where  held  HQ 

§  88.  Steps  Necessary  to  complete  Organisation   88 

§  89.  Adoption  of  By-Laws   ^   ^  gg 

§  90.  Election  of  Directors   188 

8  01.  Power  to  hold  Meetings  for  the  Election  of  Directors  witboat 

the  Domiciliary  State  ,   jq^ 

§  92.  Voting  by  Proxy    .    .    .  •  ".    i                       !  104 

§  93.  First  Directors'  Meeting      .    .    .    ^  !    !    *   !  105 

8  94.  Election  of  Corporate  Officers  1   !   1   !   !  107 

8  85.  Appoinknent  of  Executive  Committee  !   !   !  107 

8  86.  Stoek  Assessments  *  1   !   !  !  108 

8  ^.  CttrtiJIeates  required  to  be  made  by  Officers  or  Directors  after 

P^^^n^on  .   .    .  i  

8  08.  Time  in  which  Corporation  mnslofganisa  and  commence  Business  109 

8  09.  Stodr  Certmcates   110 


TABUt  Of  COMTBMm 


CHAPTER  IV. 

laSUAMCS  AMD  rATMlHT  OP  CAFITAL  STOCK. 

}  100.   General  Remarks  as  to  the  Issuance  and  Payment  oi  Cft^lftl 

Stock  upon  the  Organization  of  a  Corporation   .    .    ,    .    ,  112 

f  101.  Minner  of  Payment  of  Capital  Stock   113 

I  102.   Payment  of  Capital  Stock  in  Services  !   !   !  120 

I  108.  P^jvent  of  Ci^Htal  Stock  in  Property  1*>0 

I  101.  Statement  <rf  True  Value  Rule                             ,   ,  r»9 

fm  Stelement  of  Good  Faith  Rule  \  V>1 

§100.  Stetement  of  «%eealaliTe  Value  Role"   125 

{  107.  Effect  of  Appraisal  of  Property  by  Direeton  under  Statutory 

Astlioritj,  when  taken  la  Ezdiange  for  Stock   187 

§  108.  Effect  of  An»nu8al  of  Value  ot  Twpwij  bj  State  Officials  when 
the  same  is  taken  by  Corporatkms  in  Exchange  for  their 

Capital  Stock  

§  109.   Meaning  of  Non- Assessable  Stock   ..........  HI 

S  no.  Meaning  of  Full-Paid  Stock  [142 

CHAPTER  V. 

LEGISLATIVE  CONTROL  OVER  DOMESTIC  CORPORATIONS. 

I  111.  Statement  of  Principal  Methods  by  which  LegisUtive  Control 

oforBomeetie  Corporations  is  obtained    .......  145 

§  112.  Amendment  of  Charters   145 

§  113.   Reserved  Right  of  the  State  to  repeal  Charters    ]58 

§114.   Logisl.'itive  Control  over  Dissolution  of  Corporations  ....  154 

§  115.   Forfeiture  of  Charters  167 

§  116.   The  Police  Power  of  the  State   160 

§  117.    Legislative  Investigation  into  Corporate  Affairs   164 

§  118.   legislative  Requirement  of  Annual  R^rts  from  Corporations  164 

§  119.   Inspection  of  Corporate  Books   165 

§  120.    Anti-Trust  Legislation   167 

§  121.    Regulation  of  Internal  Affairs   168 

§  122.   Liability  of  Stockholders  for  Debts  of  the  Corporation    .    .    .  169 

§  123.    Statutory  Liability  of  Directors   174 

§  124.    Extension  of  Corporate  Existence   176 

§  125.    Taxation  of  Domestic  Corporations   177 

I  12(1.  Bsfolation  of  the  Bij^t  of  the  ConsoUdation   178 


« 


CHAPTER  VI. 

UMIiHUkTITS  OOMTBOI.  OTUi  FOBXmV  OCMWOBATIOm. 

§  127.   Extent  of  Legislative  Power  of  the  various  Commonwealths 

over  Foreign  Corporations   ISO 

§  128.    Doctrine  of  State  Comity  134 

§  129.   What  constitutes  doing  Business  on  the  Part  of  a  Foreign  Cor- 
poration within  the  State  190 


TABLE  OF  CONTENTS. 

ill 

S  180.  Penalty  for  transacting  BuainesB  in  a  Foreign  State  withoat 

obtaining  a  Permit  '  

§  131.   License  Tax  on  Foreign  Corporations  

§  132.    Annual  License  Tax  on  Foreign  Corporations  

§  133.  To  what  Extent  is  the  Taxing  Power  of  the  State  with  reference 
to  Domestic  Yind  Foreign  Corp)orations  engaged  in  Interstate 
Commerce  limited  by  the  Commerce  Clause  "  of  the  Federal 
Constitution?   •  


INTENTIONAL  SECOND  EXPOSURE 




CHAPT£E  IV. 

ISSUANCE  AND  PAYMENT  OF  CAPITAL  STOCK. 

f  100.  General  Kemarks  as  to  tfae  Issnaiiee  and  Payment  of  Capital 

Stock  upon  the  Oiganiiation  of  a  Corporation  

§  101.   Manner  of  Payment  of  Capita]  Stoek   113 

§  102.   Payment  of  Capital  Stock  in  Serrioes  12« 

§  103.    Payment  of  Capital  Stock  in  Pkopwfy  l^Q 

§  104.    Statement  of  True  Value  Rule   1^ 

§  105.    Statement  of  Good  Faith  Rule   J^S 

§  106.    Statement  of  "  Speculative  Value  Rule  i  12« 

§  107.   Effect  of  Appraisal  of  Property  by  Directors  under  Statvtory 

Authority,  when  taken  in  Exchange  for  Stock   187 

§  108.    Effect  of  Appraisal  of  Value  of  Property  by  State  Officials  when 
the  same  is  taken  by  Corporations  in  Exchange  for  their 

Capital  Stock  

§  109.   Meaning  of  Non- Assessable  Stock  Hi 

f  110.  Meaning  of  Full-Paid  Stock  .*   ]  142 

CHAPTER  V. 

zmwLAnrm  cmmoh  ormm  wmmmc  oonroRATioiis. 

§  111.   Statement  of  Principal  Methods  by  which  Legislative  Control 

over  Domestic  Corporations  is  obtained  145 

§  112.    Amendment  of  Charters   145 

§  113.    Reserved  Right  of  the  State  to  repeal  Charters    I.53 

§114.    Logislative  Control  over  Dissolution  of  Corporations  ....  154 

§  115.   Forfeiture  of  Charters   157 

§  118.   The  Police  Power  of  the  State   iqq 

S  117.   Legislative  Inyestigation  into  Corporate  Affairs   164 

§  118.   LegislatiTe  Bequirement  of  Annual  Reports  from  Corporations  164 

§  119.  Inspection  of  Corporate  Books   I65 

f  120.  Anti-lVost  L^ritbition   167 

I  12L  Begolalion  of  Itttomal  AAOfs   I68 

I  122.  Liability  of  StoekhcdderB  for  Debts  of  the  Corporation    ...  169 

i  128.   Natatory  LiaK^ty  el  Directors  ...........  174 

§  124.   Eztensbn  of  Corporale  EzisieBee   i7e 

§  125.    Taxation  of  Domestic  Corporations  177 

§m  fiegttlation  ol  the  Bight  of  the  Consolidatloii  ]  m 

CHAPTER  VI. 

LEGISLATIVE  CONTROL  OYER  FOREIGN  COBPOBATIONS. 

f  127.  Bitenl  of  Legisialife  Bower  of  the.  Tarions  Commonwealths 

OT«r  Foreign  Corporations   ]9q 

§128.   Doctrine  of  State  Comity   .  184 

§  129.  What  constitutes  doing  Basinesi  on  tiM  Fiul  of  a  Foreign  Cor- 

porstioa  within  the  State  .190 


TAM«3S  07  COKTBNIS.  XT 

§  180.   Penalty  for  transacting  Business  in  a  Foreign  State  without 

obtaining  a  Permit  "  195 

§  131.    License  Tax  on  Foreign  Corporations  198 

§  132.    Annual  License  Tax  on  Foreign  Corporations  199 

§  183.  To  what  Extent  is  the  Taxing  Power  of  the  State  with  reference 
to  Domestic  Imd  Foreign  Corporations  engaged  in  Interstate 
Commerce  limited  by  the  Commerce  Clause  "  of  the  Federal 
Constitiition?  •  202 


A  TREATISE 

OH  THB 

INCORPORATION  AND  ORGANIZATION 

OF  CORPORATIONS. 


INTEODUCTION. 

The  development  of  the  modern  business  corporation  act  has 
been  most  curious  and  interesting.   Previous  to  ike  year  188T 
charters  could  be  procured  only  by  special  act  of  the  legislature. 
In  that  year  the  legislature  of  Connecticut  passed  the  first  busi- 
ness corporation  act  that  went  into   force  and  effect  in  the 
United  States.   It  was  drawn  by  Theodore  Hinsdale,  of  Win- 
chester, Connecticut,  a  Yale  graduate  of  the  class  <rf  1821.  As 
this  act  forms  the  basic  work  of  most  of  the  business  corporation 
acts  of  to^ay,  it  deserves  more  than  passing  notice.   It  was  d  rafted 
for  the  purpose  of  permitting  incorporation  thereunder  of  com- 
panies for  the  purpose  of  carrying  on  a  manufacturing,  mechan- 
ical, mining,  and  quarrying  business.    The  statutory  powers  of 
corporations  incorporated  thereunder  were  enumerated  as  follows : 
To  sue  and  be  sued,  to  have  a  common  seal,  to  elect  officers,  to 
fix  their  compensation  and  duties,  to  establish  by-laws,  to  em- 
ploy  agents,  mechanics,  and  laborers.   Incorporation  was  limited 
to  one  purpose,  to  be  distinctly  and  definitely  set  forth  in  the  artr 
icles  of  agreement  which  were  required  to  be  signed  by  all  the 
incoqwrators.   A  board  of  directors  was  provided  for ;  also  a 
president,  secretary,  and  treasurer.   Power  was  given  to  the  cor- 
poration to  forfeit  stock  of  stockholders  for  non-payment  of  stock 
subscriptions.   The  corporation  also  had  a  Uen  iqwn  Ihe  stoek  of 
Its  members  for  debts.  After  the  articles  were  signed  and  the 
corporation  organised  and  the  articles  of  association  published. 


1 


INCOBPOEATION  AND  ORGANIZAtlON  OP  COBPOBATIONS. 


the  officers  were  required  to  make  and  file  with  the  Secretary  of 
State  (and  a  duplicate  thereof  with  the  town  clerk  of  the  town 
where  the  corporation  was  to  transact  its  business)  a  certificate 
setting  forth,  (1)  the  purpose  of  the  corporation  ;  (2)  the  amount 
-^  itscapitaUtock;  (3)  the  names  of  stockholders  and  the  nura- 
b#»r  of  shares  held  by  each.  Annual  reports  were  made  obhga- 
tory  Stockholders  were  made  liable  for  all  capital  refunded 
to  them,  and  made  personally  liable  for  the  declaration  of  illegal 

dividends.  ^     ^  i. 

The  passage  as  well  as  the  operation  of  the  first  Connecticut 
act  was  watehed  closely  by  the  legislative  bqdies  of  the  neighbor- 
ing States,  with  the  result  that  by  1850  there  were  m  the 
neighborhood  of  a  score  of  general  business  corporation  acts  m 
force  and  effect  in  various  parts  of  the  country  modelled  with  . 
some  few  exceptions  closely  after  the  Connecticut  act  above  re- 
ferred  to.   The  operation  of  these  general  acts  was  so  satisfac- 
tory that  a  new  element  appeared  in  the  passage  by  various  States 
of  constitutional  amendments  forbidding  absolutely  the  creation 
of  private  corporations  for  purposes  of  profit  hj  special  act  of 
the  legislature.    This  has  been  continued  until  at  the  present 
time  special  charters  cannot  be  procured  save  in  seven  of  the 

Commonwealths. 

The  next  development  is  to  be  noted  along  the  line  of  enlarge- 
ment of  corporate  purposes  and  powers.    Gradually  the  restnc-. 
tion  of  the  earlier  incorporation  acts  limiting  the  right  and 
benefits  thereof  to  those  desiring  to  incorporate  companies  for 
manufacturing  and  mining  purposes  was  removed  so  as  to  permit 
practically  of  incorporation  for  any  lawful  purpose.   At  the  same 
time  there  came  a  demand  on  the  part  of  prospective  incorpora- 
tors for  o-reater  powers  than  were  permitted  at  common  law, 
— anch,  for  example,  as  the  right  to  perform  constituent  acts 
outside  of  tiie  domiciliary  State,  to  hold  stock  and  bonds  in  other 
corporations,  and  to  amend  their  charters  unrestrictively .   In  this 
wav  there  came  to  be  found  in  many  of  the  corporation  acts  a 
large  number  of  extraordinary  powers  which  were  not  recogmzed 
at  common  law.    This  served  to  greatly  popularize  the  corporate 
form  of  organization  as  compared  with  individual,  partnership,  or 
joint  stock  company  enterprises.   The  result  which  followed  was 
natural.   The  several  State  legishitiires  proceeded  one  after  the 
other  to  enact  statutes  compelling  incorporators  when  orgamzmg 

2 


INTEODUCTION. 


corporations  to  pay  a  license  tax  graduated  according  to  the  cap- 
italization of  the  corporation.  In  this  way  certain  Stetes  —  nota- 
bly New  Jersey,  New  York,  Delaware,  West  Virginia,  and  Maine  — 
have  secured  a  very  large  revenue  —  all  to  the  satisfaction  of  the 
average  tax-payer. 

It  is  characteristic  of  State  legislatures  that  they  never  fail 
to  take  advantege  of  an  opportunity  to  relieve  a  majority  of 
voters  from  the  burdens  of  texation  at  the  expense  of  a  few. 
Doubtless  it  was  with  this  laudatory  purpose  in  mind  that  they 
next  proceeded  to  enact  statutes  requiring  corporations  to  pay  an 
annual  license  tax  based  upon  either  their  authorized  capiteliza- 
tion,  the  amount  of  capitel  invested  in  the  State,  or  the  amount  of 
dividends  paid  annually  to  stockholders.   The  success  of  a  few 
States  in  securing  large  revenues  from  both  organization  and 
license  taxes  resulted  in  legislative  action  in  other  States  taken 
with  a  view  to  securing  a  proper  share  of  the  incorporation  busi- 
ness, wliich  had  hitherto  enured  to  the  benefit  of  two  or  three 
favored  Commonwealtiis,   This  may  be  properly  described  as  the 
era  of  the  "  tramp  corporation."   That  is,  it  was  about  this  time 
that  there  appeared  a  well-defined  tendency  on  the  part  of  incor- 
porators to  go  outside  of  the  State  of  their  residence  for  a  charter 
under  which  they  planned  to  do  business  exclusively  in  some 
foreign  State.    The  result  has  been  that  incorporatora  have  grad- 
ually accustomed  themselves  to  going  for  their  charters  to  tliose 
States  which  are  commonly  known  as  leading  incorporating 
States.    In  this  group  will  be  found  at  the  present  time  New 
Jersey,  New  York,  Delaware,  West  Virginia,  South  Dakota, 
Maine,  Nevada,  Arizona,  Connecticut,  District  of  Columbia* 
Virginia,  Oklahoma,  North  Carolina,  and  Alabama. 

Speaking  in  general  terms,  it  may  be  said  that  a  great  majority 
of  the  business  corporation  acts  in  force  in  this  country  toniay  are 
sadly  in  need  of  revision.  Tims,  for  example,  the  incorporation 
acts  of  Iowa,  Nebraska,  New  Hampshire,  Vermont,  Bhode  Islaid, 
Arizona,  Mississippi,  and  the  District  of  Columbia  are  more  or 
less  crude  in  construction,  and  lack  many  of  the  essentials  of  com- 
plete and  satisfactory  acts.  The  incorporation  laws  of  Georgia, 
Pennsylvania,  and  Maryland  are  veritable  "legal  antiques,"  and 
would  bear  revision  without  any  injury  whatever  to  the  best 
interests  of  those  Commonwealths.  Tlie  incorporation  acts  of 
ludiana,  Minnesota,  Tennessee,  Pennsylvania,  and  Louisiana  are 

3 


INGOBFOBATIOH  Alll>  OBGAKBttTION  OF  OOMOKATIOHS. 

BO  involved  as  to  lead  to  almoBt  certain  ooidnsion  when  an  attempt 

is  made  to  take  advantage  of  their  provisions. 

In  regard  to  the  attitude  taken  by  the  legislatures  of  the  several 
States  in  the  framing  of  these  General  Acts,  attention  is  called  to 
aome  r^narks  of  the  CkMnmittee  on  Corporations  addressed  to  the 
lepslatnre  of  Massachnaetta  in  1908,  which  were  aa  f  oUowa : 

"The  history  of  corporations,  as  well  as  the  logic  of  the  case, 
shows  that  there  are  possihle  two  general  theories  as  to  the  State's 
duties  in  creating  corporations.    First,  the  old  theory  that  hemg 
creatures  of  the  State,  they  should  be  guaranteed  by  it  to  the  public 
in  all  particulars  of  responsibility  and  management;  and  the  modern, 
qnite  opposite  theory  that,  in  the  absence  of  fraud  in  its  creation  or 
government,  an  orduiaiy  husiness  corporation  should  be  allowed  to  do 
anythmg  that  an  individual  can  da   Under  the  old  theory  the  capi- 
tal stock  of  a  corporation  was,  in  tiie  law,  considered  to  be  a  guarantee 
fund  for  the  payment  of  creditora  aa  weU  as  affording  a  method  of 
corporate  enterprise.   There  resulted  from  tiiis  principle  not  only  the 
fundamental  proposition  that  the  capital  stock,  heing  in  the  natnre 
of  a  guarantee  fund,  should  be  paid  for  at  its  par  value  m  actual 
cash,  but  all  the  other  provisions  to  protect  creditors  or  other  persons 
having  dealings  with  the  corporation,  such  as  that  the  debts  of  a 
corporation  should  not  exceed  its  capital  stock,  designed  primarily  in 
the  iuterest  of  loeditora,  and  secondarily  in  that  of  the  stockholders, 
who  are  looked  after  aa  caiofuUy  as  if  they  were  wards  of  the  State 
when  dealing  in  corporation  matters.   Under  tiie  modem  tiieory,  the 
State  owes  no  duty  to  persons  who  may  choose  to  deal  with  oorporo- 
tions  to  look  after  the  solvency  of  such  artificial  hodies;  nor  to  the 
stockholders  to  protect  them  from  the  consequences  of  gomg  into 
looh  concerns,  the  idea  being  that  in  the  case  of  ordinary  business 
corporations  tiie  State's  duty  ends  in  providing  clearly  that  creditors 
and^toekholders  shall  be  at  all  times  precisely  informed  of  all  the 
faks  attendfaig  hotii  tiie  organization  and  the  management  of  such 
corporations,  and  partieuhiily  tiiat  tiiere  shaU  be  fuU  pubUcity  given 
to  all  details  of  the  original  organiaation  thereof." 

It  may  be  of  some  practical  value  at  this  pomt  to  inqmre  hriefly 
what  are  the  advantages  of  conducting  business  under  corporate 
management  ratiier  than  as  an  individual  or  a  copartnership  en- 
terprise. rni6Be  advantages  may  be  enumerated  as  follows: 

First,  Immunity  from  individual  liabiUty  for  dehte  ariamg  out 
of  the  conduct  of  the  business. 

4 


INTEODUCTION. 


Second,  The  securing  of  the  element  of  perpetuity  for  the  life 
of  the  enterprise  in  hand,  so  that  the  death  of  any  of  the  parties 
interested  does  not  interfere  with  the  conduct  of  tiie  bosinesa. 

2%m2,  The  good-will  and  prestige  of  the  business  is  not  then  the 
property  of  an  individual,  but  belongs  to  the  corporation. 

Fourth,  The  ease  with  which  capital  is  obtained  for  the  use  of 
the  business  through  the  sale  of  stock,  thus  doing  away  with  the 
danger  or  necessity  of  admitting  general  or  special  partners  into 
the  concern. 

Fifth,  The  facility  with  which  money  can  be  obtained  by  the 
sale  of  bonds  or  preferred  stock. 

Sixth,  The  ease  with  which  individual  interests  in  a  business 
may  be  sold  or  transferred,  without  the  necessitj  of  obtaining  the 
consent  of  a  third  party  to  the  sale. 

Seventh^  The  remo^  of  the  danger  of  being  ruined  through 
the  dishonesty  or  extravagance  of  a  partner. 

Mghth,  The  small  expense  connected  with  the  incorporation  of 
an  enterprise. 

Mnth^  The  wide  and  far  reaching  extension  of  the  powers  of  a 
corporation  as  compared  with  that  of  individuals  and  copartners. 

But  the  advantages  of  corporate  management  being  stated,  the 
question  then  arises  :  Where  should  the  business  man  of  to-day  go 
to  procure  a  charter  for  the  enterprise  he  may  have  in  hand? 
With  forty-five  States,  five  Territories,  and  the  District  of  Columbia 
all  offering  facilities  for  incorporation,  the  task  of  selection  there- 
from is  by  no  means  an  easy  one.  Where  the  capitalization  is 
small  or  the  corporate  purposes  simple,  it  is  sometimes,  though 
not  always,  best  to  procure  a  charter  from  the  State  where  tiio 
principal  prospective  incorporators  reside  or  where  thej  propose 
to  carry  on  the  company's  business.  On  the  otiier  hand,  if  the 
capitelization  is  to  be  sought  in  other  localities,  the  proposed  cor- 
porate business  interstate  in  cliaracter,  or  the  prospective  capital- 
ization large,  and  the  corporate  purposes  sought  for  broad  in 
character,  then  it  may  be  of  great  advantege  to  procure  a  charter 
in  some  outside  Stete.  Under  such  drcumstences  recourse  is 
usually  had  to  what  are  recognized  as  the  leading  incorporating 
Stetes  already  referred  to. 

But  to  go  further,  it  may  be  stated  that  a  proper  investigation 
into  the  question  as  to  where  to  look  for  a  charter  best  suited  to 
the  immediate  purposes  of  the  i»t>ppBed  corporation  must  necessa- 

5 


INCORPORATION  AND  ORGANIZATION  OP  COBPOBATIONS. 

rily  entail  an  investigation  among  many  others  into  the  following 
matters: 

1.  Nature  of  the  business  corporation  act  of  the  State  wherein 
it  is  proposed  to  incorporate. 

2.  Policy  of  such  States  towards  corporations,  domestic  and 

foreign. 

3.  Publicity  required  as  to  the  condition  of  corporations  or- 
gauized  under  the  laws  of  that  particular  State. 

4.  Extent  of  l^isLative  control  over  private  corpofstions. 

5.  Nature  of  corporate  powers  desired. 

6.  Initial  expense. 

7.  Amount  of  annual  franchise  tax,  if  any. 

8.  Amount  of  capitalization  permitted,  and  the  par  value  of 
shares  allowed. 

9.  Tune  within  wlMi  the  capital  stock  must  be  paid  up. 

10.  Question  as  to  whether  stockholders'  and  directors'  meet- 
ings must  be  held  within  the  State  in  which  the  charter  is  procured. 

11.  Question  as  to  whether  the  principal  office  of  the  corpora- 
tion may  be  maintained  outside  of  the  State  of  its  organization. 

12.  Ascertainment  of  the  question  as  to  whether  stock  can  be 
legally  issued  for  property  or  services  instead  of  for  cash. 

13.  Inquiry  as  to  what  extent  the  appraisal  of  the  board  of  di- 
rectors of  the  property  or  services  paid  for  by  the  issuance  of 
stock  is  conclusive  upon  the  creditors  of  the  corporation  seeking,  in 
case  of  insolvency,  to  enforce  an  allied  liability  for  unpaid  stock. 

14.  Power  to  issue  preferred  stock. 

15.  Par  value  of  the  corporate  shares  desired. 

16.  Power  to  create  debts. 

17.  Ease  or  diiiiculty  with  which  the  charter  n(iay  be  amended. 

18.  Amount  of  stockholders'  liability,  if  any. 

19.  Extent  ofdirectors'llalHlity,  if  any. 

20.  Ease  or  difficulty  with  which  ^e  corporation  may  be 
dissolved. 

21.  Nature  of  the  laws  of  the  various  States  with  reference  to 
the  terms  and  conditions  under  which  foreign  corporations  may 
do  business  therein. 

Each  of  the  foregoing  questions  has  its  proper  bearing  when  it 
comes  to  deciding  where  to  go  for  a  charter  for  some  particular 
business  enterprise  which  it  is  proposed  to  prosecute  under  the 
form  of  corporis  orga^izatioQ. 
0 


iNraoDUcnoN. 


A  discussion  of  each  of  these  matters  will  be  found  in  Part  I. 
of  the  present  treatise. 

Turning  now  to  the  character  of  the  business  corporation  acts 
passed  by  the  legislatures  of  the  various  States  and  Territories,  it 
will  be  apparent  to  all  that  many  of  them  are  ^  wonderfully  and 
fearfully  made." 

If  one  were  to  attempt  to  characterize  and  compare  the  various 
incorporation  acts  of  the  several  States  and  Territories,  it  would 
be  found  a  task  of  great  difficulty,  for  the  reason  that  it  is  almost 
impossible  to  find  a  logical  basis  for  classification.  Any  number 
of  arbitrary  classifications  might  be  adopted,  but  these  would  be 
of  no  value  to  either  the  practitioner  or  the  public  at  large.  "What- 
ever attempt  may  be  made  here  along  this  line  must  be  based 
solely  upon  the  most  general  lines  of  similarity  of  the  incorporation 
acts  of  various  States.  As  a  preliminary  to  this,  it  has  been 
noted  that  certain  Stiates  and  Territories  are  known  and  recog- 
nized as  *'  leading  incorporating  States."  The  ones  to  which  ref- 
erence is  made  are  New  Jersey,  New  York,  Delaware,  West 
Virginia,  Maine,  South  Dakota,  Connecticut,  Massachusetts,  Ari- 
zona, Nevada,  District  of  Columbia,  and  Virginia.  The  great  ma- 
jority of  charters  taken  out  annually  in  this  country  are  procured 
in  the  foregoing  enumerated  States  and  Territories. 

By  many  the  New  Jersey  act  is  considered  to  be  a  model  of 
what  a  business  corporation  act  should  be.  This  fact,  coupled 
with  the  large  revenue  secured  by  the  State  of  New  Jersey 
through  this  medium,  has  resulted  in  the  passage  in  other  States 
of  statutes  modelled  more  or  less  closely  after  the  New  Jersey  act. 
This  fact  prompts  the  first  classification  that  will  be  attempted 
here,  which  will  be  termed  the  "  New  Jersey  Class."  Within  the 
limits  thereof  may  be  properly  included  not  only  New  Jersey,  but 
New  York,  Delaware,,  West  Virginia,  Alabama,  Nevada,  North 
Carolina,  New  Mexico,  and  Virginia  as  well. 

Another  classification  would  embrace  a  large  number  of  West- 
ern States  and  Territories,  which  to  a  greater  or  less  extent 
have  modelled  their  corporation  acts  along  the  same  general 
lines  as  that  of  California.  This  class  may  properly  be  referred 
to  as  the  California  Class,"  and  included  therein  will  be 
found  Colorado,  North  Dakota,  South  Dakota,  Oklahoma,  Idaho, 
Montana,  Oregon,  Washington,  Utah,  Wyoming,  Texas,  and 
Arizona. 

7 


I 


INCOBPORATION  AND  ORGANIZATION  OF  COBPOJELLXION& 

Another  group  will  be  known  as  the  "  Maine  Gronp,"  for  the 
reason  that  tJie  plan  has  been  tiierein  adopted  of  haying  the  cor- 
poration oi^anized  before  a  certifieate  of  inoorporation  or  organiza- 
tion is  filed  with  or  issued  by  the  State  officials.  In  this  class 
belong  Maine,  Massachusetts,  Connecticut,  Illinois,  Missouri, 
Arkansas,  and  Indian  Territory. 

Iowa  and  Nebraska  have  acts  very  closely  resembling  each 
other,  and  may  be  grouped  as  the  ^  Iowa  Class."  In  another 
gronp,  which  we  shall  call  the  **  Pennsylvania  Class,"  are  to  be 
found  Pennsylvania,  South  Carolina,  Florida,  Mississippi,  and 
Kansas.  The  distinguishing  feature  of  this  class  is  that  the  incor- 
poration scheme  adopted  embraces  a  petition  for  incorporation  by 
the  incorporators  addressed  to  State  officials,  to  be  followed  by 
the  filing  of  a  certificate  of  inoorporation  if  the  petition  is 
favorably  acted  npon. 

Another  group  may  be  known  as  the  "  Kentucky  Group,"  in 
which  belong  Kentucky,  Ohio,  New  Hampshire,  Rhode  Island,  and 
Vermont.  There8emhlanoebere,itmastbeacbnitted,ismore&ui- 
cied  than  real,  and  probably  does  not  depend  upon  any  actual  in- 
tent to  copy  the  first  Kentocky  act.  In  the  Michigan  Class  "  are 
to  be  found  Michigan,  Wisconsin,  and  Minnesota,  all  of  which 
possess  acts  resembling  each  other  in  certain  features.  It  is 
impossible  to  place  Georgia,  Indiana,  Louisiana,  Maryland,  and 
Toinessee  in  any  specified  class.  They  all  possess  inadequate 
and  certainly  unique  business  corporation  acts,  which  are  not 
likely  to  be  copied  by  any  other  State  in  this  day  and  generation. 


8 


INCOEPOEATION  AND  ORGANIZATION  OF 

COEPORATIONS. 


CHAPTER  L 

dbafunq  the  cha&xer. 

§  1.  Oenend  Remarks  on  Coiponite  Piarteis.  —  Incorporation 

is  a  form  of  expression  of  the  sovereign  political  power  of  the 
State  in  the  creation  of  a  juristic  person  possessing  such  limited 

powers  as  may  be  granted  to  it  by  the  legislative  branch  of  our 
State  or  national  government.  The  growth  of  thfe  corporate 
form  of  organization  affords  an  example  of  the  rapid  evolution 
from  a  somewhat  cireumseribed  b^inning  to  proportions  tiiat 
can  only  be  described  in  this  age  of  industrial  trusts  and  com- 
binations as  colossal  in  character.  Even  the  courts  have  not 
infrequently  called  attention  to  the  modern  disposition  to  incorpo- 
rate everything.  1 

Much  of  this  is  due  no  doubt  to  the  passage  by  the  various  Sti^ 
legislatores  of  what  are  commonly  known  as  business  corpora- 
tion acts."  The  phrase  *•  business  corporation,"  in  this  connec- 
tion, is  a  broad  term,  and  includes  all  corporations  engaged  in 
business  for  profit,  as  distinguished  from  municipal  and  eleemosy- 
nary corporations.^  The  creation  of  corporations  organized  for 
profit  by  special  act  is  now  fcHrbidden  by  constitotional  pro- 
vision in  all  but  seven  of  the  States.*  The  existence  through- 
out the  country  of  general  incorporation  acts  has  fully  reversed 
the  old  policy  of  granting  exclusive  privileges  of  any  kind  to 
corporations.^ 

^  See  In  re  Italian  Mat  Baa.  AfB*ii,  New  Hampshire,  Rhode  Maud,  Sontli 
4  Pa.  Dis.  Rep.  357.  Carolina,  and  Vermont. 

*  Adams  y.  Company,  Fed.  Cases  No.  47.      <  People  v.  Company,  130  III  268;  1 

*  Ookmeelicat,  Horida^  Maasadmsettts  N.  £.  798. 

d 


§  1  INCOBPOSATION  AKD  OBGANIZATION  OF  COBPOBATIONS.   [PABT  I. 

The  purpose  of  restiicthig  the  power  to  create  corporationB  by 
special  act  has  been  well  set  forth  as  follows :  "  To  inaugurate  the 
policy  of  placing  corporations  of  the  same  kind  upon  a  perfect 
equality  as  to  all  future  grants  and  powers  by  making  such  laws 
applicable  to  all  parts  of  the  State  and  thereby  securing  the  vigi- 
lance and  attention  of  its  whole  representation,  and,  finally,  of 
making  the  judicial  constrndiion  of  their  powers  or  the  restric- 
tions imposed  upon  them  equally  applicable  to  all  corporations  of 
the  same  class."  ^ 

It  is  universally  recognized  in  this  country  that  legislative 
authority  is  essential  to  the  creation  of  a  corporation.^  Incor- 
porators cannot  come  together  and  agree  to  become  a  corporation 
without  conforming  to  legislative  requirements.*  It  has  been  well 
said  "that  there  is  an  obvious  reason  for  making  such  organiza- 
tion by  written  articles  of  agreement  a  condition  precedent  to  the 
exercise  of  corporate  rights.  It  is  the  basis  upon  which  all  subse- 
quent proceedings  are  to  rest,  and  is  designed  to  take  the  place  of 
a  charter  or  act  of  incorporation  by  whioli  corporate  rights  and 
privileges  are  usually  granted.  .  If  there  were  no  such  provisions, 
there  would  be  an  absence  of  any  provision  by  which  the  right  to 
exercise  corporate  powers  could  be  definitely  fixed  and  established, 
and  there  would  be  no  means  of  ascertaining  the  rights  of  stock- 
holders and  of  persons  dealing  witii  snch  association.'*  * 

The  charter  of  a  company  together  with  the  general  laws  of  the 
State  of  its  creation,  enumerating  and  limiting  the  powers  of  all 
corporations  of  that  class,  constitutes  the  measure  of  its  powers, 
and  the  enumeration  thereof  implies  the  exclusion  of  all  other 
powers  except  snch  as  are  incidentally  or  necessarily  implied.* 

The  instrument  by  which  corporations  are  created  is  known  by 
different  names  in  various  parts  of  the  country.  The  term 
"  charter  "  is  a  word  which  has  descended  to  us  from  the  common 
law  existing  in  England  long  before  the  United  States  became  a 
nation.  It  originally  referred  to  the  specific  gtmt  of  certain 
privileges  running  from  the  sovereign  to  a  subject.  Subsequently 
it  was  applied  in  this  country  to  a  specific  act  of  the  legislature 

»  Atkinson  ».  Company,  15  O.  81  21 ;  *  Utter  v.  Union  Tool  Ca,  11  Gray 

see  also  Ex  parte  Frits,  9  la.  30.  (Mass.),  139. 

2  McKim  V.  Odom,  S  Blaiid's  dwo^  °  G.  L.  &  H.  I.  Co.  v.  Kamper,  73  Ala. 

eery  (Md.),  407.  325;    Steiner  v.  Steiner  L.  &  L.  Co. 

»  Stowe  V,  Flagg.  72  HL  397.  (Ala.),  26  So.  494 ;  Salt  Co.  v.  East  Sagi- 
naw, 13  WalL  (U.  S.)  378. 

10 


CHAP.  I.] 


DRAFTING  THE  CHABTEB. 


§1 


creating  a  corporation  with  distinct  and  exclusive  purposes  and 
powers.  With  the  advent  of  the  passage  of  general  business  cor- 
poration acts  in  tbis  country,  the  word  "cbarter"  has  been  re- 
placed by  such  terms  as  articles  of  incorporation,"  articles  of 
association,"  "  certificate  of  incorporation,"  "  certificate  of  oi^ni- 
zation,"  and  "  petition  for  incorporation."  It  goes  without  saying 
that  under  the  Business  Corporation  Acts  referred  to  there  must 
be  articles  of  some  sort  properly  executed.^ 

It  has  been  said  that  the  essence  of  a  corporation  consists,  first, 
in  its  capacity  to  have  perpetual  snccession  under  a  special  name 
and  in  an  artificial  form ;  second,  to  take  and  grant  property  and 
contract  obligations,  sue  and  be  sued  by  its  corporate  name  as  an 
individual ;  and  third,  to  receive  and  enjoy  corporate  privileges 
and  immunities.  The  first  two  are  the  privileges  of  the  incorpo- 
rators, and  the  third  is  the  franchise  of  the  corporation.' 

As  far  back  as  1612  Lord  Coke  enumerated  the  essentials  of  a 
corporate  charter  as  follows  :  (1)  lawful  authority  for  incorpora- 
tion ;  (2)  persons  to  be  incorporated ;  (3)  corporate  name ;  (4) 
domicile;  (5)  words  sufficient  in  law  enumerating  the  purposes 
and  powers  of  the  corporation.  All  of  these  essentials  and  many 
more,  which  by  statute  are  made  essentials,  are  to  be  found  in 
the  business  corporation  acts  of  to-day. 

Referring  now  briefly  to  those  matters  which  are  by  statute  in  this 
country  made  necessary  parts  of  articles  of  incorporation,  the  follow- 
ing may  be  said :  with  the  exception  of  Arkansa^,  Georgia,  In- 
dian Territory,  Maine,  Massachusetts,  Mississippi,  New  Hampshire, 
Ohio,  Oregon,  Rhode  Island,  South  Carolina,  Tennessee,  and  Ver- 
mont, all  have  incorporation  acts  requiring  that  the  duration  of  cor- 
porate existence  shall  be  set  forth  in  the  articles  of  incorporation. 

Again,  all  but  New  Hampshire  and  Tennessee  require  a  state- 
ment as  to  the  number  and  par  value  of  shares.  More  than 
half  the  States  prescribe  that  the  names  of  the  first  or  tem- 
porary board  of  directors  shall  be  inserted  in  the  articles,  while 
most  of  the  remaining  States  require  that  the  number  of  directors 
only  shall  be  inserted.  Fully  half  the  States  authorize  the  inser- 
tion in  the  articles  of  provisions  for  the  issuance  of  preferred 
stock.   A  few  of  the  Commonwealths  require  that  the  articles 

1  Abbott  V.  Companj,  4  Neb.  416;       ^  Snell  v.  City  of  Chicago,  133  X0.413; 
Lank  v.  Biggs  (Neb.),  97  N.  W.  1033;  24  N.  £.  532. 
Giiadiv.Saiith»S5Bsrb.(N.T.)45.  ' 

11 


§  2    INCOBPOEATION  AND  OBGANIZATION  OF  COBPORATIOHa   [PABT  I. 

shall  contain  a  statement  as  to  the  amount  of  stock  subacriptions, 
the  amount  of  capital  stock  paid  in,  and  the  amount  of  capital 
with  which  the  corporation  wiU  begin  bmnness.  Alaska,  Arizona, 
l^elaware, Louisiana,  Iowa,  Minnesota,  Nebraska,  and  Utali  require 
tiiat  the  date  of  the  annual  meeting  shall  appear  in  the  articles. 
Alabama,    Connecticut,   Delaware,    Maryland,  Massachusetts, 
Nevada,  New  Jersey,  New  York,  North  Carolina,  South  CaroUna, 
Utah,  Virgmia,  West  Virginia,  and  Wisconsin  expressly  authorize 
the  msertion  in  the  articles  <rf  proYisions  for  the  regulation  of  the 
mtemal  affairs  of  the  corporation.   If  it  is  desired  to  protect 
stockholders  from  personal  liability  for  corporate  debts,  there 
must  be  inserted  in  the  articles  of  incorporation  of  companies 
organized  under  the  laws  of  Arizona,  Delaware,  Iowa,  Kentucky, 
and  Utah  proTision  speciaoaUy  exempting  stockholders  from  such 
iiabilify. 

And  so  the  enumeration  might  be  continued  almost  indefinitely 
of  special  provisions  required  in  particular  States  in  connection 
with  the  incorporation  of  corporate  enterprises.  ^ 

Finally,  attention  is  caUed  to  the  various  steps  necessary  to 
create  a  corporation  under  the  modem  business  corporation  acts, 
qualified  in  every  respect  to  carry  out  the  purposes  for  which' 
it  IS  formed.    These  steps  may  be  enumerated  as  follows :  (1)  the 
drafting  of  the  articles  of  incorporation;  (2)  the  signing  of 
the  articles  by  the  requisite  number  of  incorporators,  and  ac- 
knowledgment of  the  same  before  an  officer  duly  authorized  to 
take  such  acknowledgments ;  (3)  filing  and  recording  the  arti- 
cles with  the  proper  State  and  county  officials  after  payment  of 
the  requisite  organization  tax  and  filing  and  recordmg  fees ;  (4) 
organization  of  the  corporation  ready  for  the  transaction  of  busi- 
ness;  (5)  securing  the  necessary  permit  from  State  officials  (if 
any  is  required)  to  transact  business  within  the  domiciliary  State.i 

§  2.  Aioofponton.  —  An  incorporator  is  one  of  the  constituents 
of  a  corporation,  who  by  petition  or  by  means  of  the  execution 
of  articles  of  incorporation  invokes  the  exercise  of  the  supreme 
political  power  of  the  State  in  the  creation  <rf  a  corpoiation  for  the 
benefit  of  himself  and  associates  and  their  successors  in  interest.2 

The  words  «  corporator**  and  « incorporator "  have  essentially 

B.  &  N.  T.  C.  R.  R.  Co.  V.  Owen,  32 
BMrb.  (N.  Y.)  616. 

12 


CHAP.  I.] 


DRAFTmo  THE  CHABTEB. 


§2 


the  same  meaning.  The  qualifications  of  incorporators  vwtj 
with  ^e  State  from  which  the  charter  is  sought  The  usual 
number  of  incorporators  required  by  the  various  acts  varies  from 
one  to  five.^  In  Iowa  and  Nebraska  one  person  may  incorporate.* 
Residential  requirements  on  the  part  of  incorporators  exist  in 
Alaska,  California,  Idaho,  Kansas,  Maryland,  New  York,  North 
Dakota,  Ohio,  Oklahoma,  Pennsylvania,  South  Dakota,  Texas, 
Utah,  and  Wisconsin.'  Failure  to  state  residence  of  incorporators 
in  articles  is,  however,  not  fatal  to  corporate  existence.* 

The  general  rule  is  that  citizenship  is  not  necessary  unless 
specifically  required  by  the  statute  of  incorporators.^  It  has  been 
iflud  that  in  the  absence  of  statute  providing  otherwise  incorpora- 
^mi^  must  be  stockholders.*  The  rule,  however,  appears  to  be 
otherwise  in  Oregon,  Pennsylvania,  South  Dakota,  Texas,  Tennes- 
see, and  Georgia^  In  a  majority  of  the  States,  however,  statutes 
expressly  prescribe  that  incorporators  must  be  subscribers  for  at 
least  one  share  of  the  capital  stock  of  the  proposed  corporatioit. 

If  married  women  are  under  no  disabilities,  they  may  set  as 
incorporators.*  Aliens  may  be  incorporators  if  statute  does  not 
provide  otherwise.* 

Some  of  the  States  expressly  limit  the  right  to  become  incorpo- 
rators to  natural  persons.  However,  where  no  such  express  limi- 
tation exists,  there  is  no  question  but  what  the  word  ^  person,'' 
when  used  in  the  statute  Umiting  such  matters,  would  not  permit 
corporations  to  act  as  incorporators.^^ 

The  rule  seems  to  be  that  incorporators  must  be  of  full  age.^^ 
Incorporators  must  also  be  known  persons.^   The  modem  rule 

»  SeeI^Ttm.Tkbto4,]Mig«574.  67  N.  W.  947;  Ramsey  ».TW,  dS  T«. 

«  P.  B.  Corpontioii  v.  Lamson,  16  Me.  614 ;  69  S.  W.  133 ;  Byrnes  v.  Beck,  lOGft. 

224;  Ulraer  v.  Compuij,  98  Me.  679;  121 ;  B.  B.  &  T.  Co.  v.  J.  B.  T.  Co.,  101 

57  Atl.  1001.  Tenn.  545;  48  S.  W.  228;  W&chMmtg 

»  See  Part  III.  Table  5,  page  575.  v.  Bank,  64  Fed.  90. 

*  State  v.Fonlkes,  94  Ind.  493;  see  also  • /n  re  application  for  charter,  27 

Halbert «.  AaMdation  (Tex.  CiT.  App.),  34  Weekly  Notes  of  Cases  (Pa.),  899 ;  In  rt 

8.  W.  636.  CJentnry  Club,  27  W.  N.  C.  (ftu)  899. 

^  M.  N.  F.  Co.  V.  Baumbach,  32  Fed.  '  Lamar  v.  Biowiie,92  U.  8.  187;  2S 

205 ;  A.  S.  Co.  v.  Heidenheimer,  80  Teau  Law.  Ed.  650. 

844 ;  15  S.  W.  1038.  w  C.  R.  Co.  v.  P.  R.  Co.,  31  N.  J.  Eq. 

«  Gulliver  v.  Roelle,  100  111.  141 ;  Byron-  475 ;  Insurance  Co.  v.  N.  H.  P.  Co.,  87  La. 

TilleOfeaiiieiyAss'nr.Iyen  (Minn.),  100  An.  283. 

N.  W.  887;  Chase  o.Loxd,  77  N.  T.  11;  u  UMm       Globe,  ete.  Asi^  185 

Ifedler  v.  Company,  6  N.  Mex.  331.  N.  Y.  280;  32  N.  E.  122;  H.  F.  Bead  Co. 

^  Coyote,  etc.  Co.  v.  Ruble,  8  Ore.  284  ;  v.  Townsend,  13  Ont.  Ap.  Rep.  534. 

Densmore  Oil  Co.  v.  Densmore,  64  Pa.  St.  ^  C.  R.  R.  of  N.  J.  v.  P.  R.  R.  Co.,  81 

43 ;  Singer  Mfg.  Co.  v.  Peck,  9  S.  D.  29;  N.  J.  £4.  476. 

13 


§  3    INCOBPOBATION  AND  ORGANIZATION  OF  CORPORATIONS.  [PABT  I. 

seems  to  be  that  incorporators  are  merely  conduits  for  the  pur- 
pose of  organization  for  the  benefit  of  future  stockholders.^ 
Uoder  this  rule  there  can  be-no  Talid  legal  question  raised  at  this 
day  as  to  the  legality  of  the  use  of  what  are  commonly  known  as 
**daramy  incorporators"  in  the  organization  of  corporations* 

§3.  Corporate  Name.  —  Every  corporation,  like  an  individual, 
must  have  a  name  under  which  its  business  must  be  carried  on. 
It  has  been  said  that  the  name  goes  to  the  very  being  of  the  ere- 
ation,  the  knot  of  the  eomtnnation,  without  which  eorporations 
conld  not  do  their  corporate  acts,  without  which  it  is  unable  to 
implead  and  be  impleaded,  to  take  any  action  until  it  hath  gotten 
a  name."«  The  word  "  company,"  which  is  usually  a  part  of  the 
corporate  name,  does  not  necessarily  imply  a  corporation.^  In 
Alabama,  Colorado,  Connec^ut,  Delaware,  Kansas,  Kentucky, 
Missouri,  North  Carolina,  and  Virginia  statutes  exist  which  pro- 
vide that  the  corporate  name  must  end  with  some  such  word  as 
"association,"  "company,"  "corporation,"  "club,"  "society," 
"  syndicate,"  or  "  limited."  ^ 

In  a  number  of  the  States  eorporations  upon  oi^nization  are  for- 
bidden to  take  the  same  name  as  ^at  oi  an  existing  domestic  cor- 
poration, or  one  so  similar  as  to  be  calculated  to  deceive  or  cause 
confusion.^  Some  few  of  the  States  go  still  further  and  forbid  the 
use  of  the  name  of  any  foreign  corporation  by  newly  created  do- 
mestic corporations,  provided  the  former  has  secured  a  permit  to 
do  business  m  the  State.  Tb^  Suites  here  referred  to  are  Connec- 
ticut,  Delaware,  Kentucky,  Massachusetts,  New  York,  Utah,  Vir- 
ginia, and  West  Virginia.  In  the  absence  of  such  statute  there  is 
ordinarily  no  restriction  on  the  right  to  take  the  corporate  name 
of  a  foreign  corporation.^ 

The  corporate  name  is  the  property  of  the  eorporation,  and 
equity  will  protect  the  corporation  in  any  jurisdiction  from  the 

1  Densmore  Oa  Co.  v.  Densmore,  64      *  Clarke  v.  Insoxance  Co..  7  Ma  Add. 

Fk.8t.48.  77. 

*  Salamon  v.  Salaiiioii  Co.  (Hoose  of  •  On  vgoof  wotd  **  United  "see  Sparks 
Lords  Cases),  45  Weekly  Rep.  193;  75  v.  Company,  3  Idaho,  806 ;  S9  Fte.  134. 

■  Law  Times  Rep.  426.    But  see  Louisville       «  See  State  v.  McGrath,  75  Ma  484. 
Banking  Co.  v.  Eisenman,  94  Ky.  83 ;  21       ^  L.  V.  C.  Co.  v.  Hamblen,  23  Fed. 

S.  W.  531,  1049;  Tillyer  v.  Hero  Jar  Co.,  225;  G.  I.  R.  G.  M.  Co.  v.  G.  R.  Co., 

17  Phil.  (Pa.)  153.  128  U.  S.  598;  9  S.  Ct.  166;  People  v. 

•  SmtA  V,  Flaak  Boad,80  Ala.  «80;  H.  L.  Sni.  Co.,  Ill  Mich.  405  ;  69  N.  W. 
Hazelton  Boiler  Ca  v.  Cdmptnj*  137  SL  658. 

S81;28lI.ILm 

14 


V 


CHAP.  I.] 


DBAFIING  IHE  CHABTBB. 


§4 


fraudulent  use  of  another  name  so  like  it  as  to  deceive  the  public 
and  rob  it  of  its  business.!  The  mere  fact  that  the  corporation 
against  whom  a  restraining  order  is  asked  for  has  secured  a 
charter  in  that  particular  State  whUe  tlie  complaining  corporation 
has  never  been  incorporated  there  or  even  procured  a  permit  to  do 
business  there,  will  not  in  most  jurisdictions  prevent  the  erantinz 
of  such  relief.2  "  * 

Wliere  statutes  exist,  such  as  have  been  referred  to,  forbidding 
the  use  of  similar  corporate  names,  while  the  attitude  of  the  Sec- 
retaiy  of  State  in  such  cases  with  respect  to  the  issuance  of  a  cer- 
Mcate  of  incorporation  is  ministerial,  yet  he  has  reasonable 
discretion  in  the  matter  and  cannot  be  mandamused  when  exer«U- 
mg  such  discretion.3  In  protecting  the  nse  of  a  corporate  name 
the  courts  proceed  on  the  theory  that  snch  name  should  be  pro- 
tected m  equity  on  principles  analogous  to  those  which  prevail 
in  the  use  of  trademarks.* 

§  4.  Corporate  Purposes.  —  By  corporate  purposes  is  meant  tiie 
specific  declaration  in  the  articles  of  incorporation  of  the  nature 
of  the  business  which  the  corporation  is  authorized  to  carry  on 
Such  statement  is  a  matter  which  primarily  concerns  the  stock- 
Holders,  and  to  a  less  degree  the  State  under  whose  authority  the 
corporation  is  created. 

In  the  granting  of  corporate  privileges  it  is  important  to  specifr 
the  purposes  and  objects  because  the  courts  should  have  wme 
guide  in  keeping  them  within  the  powers  granted  and  conveyed. 
Unless  they  be  specified  with  particularity  in  the  petition  or  in  the 
granting  thereof,  they  might  do  as  they  pleased  and  the  law  be 
powerless  to  restrain  them.'  The  purposes  enumerated  in  the 
articles  of  association,  read  in  connection  with  the  general  laws 

:f  ^;  ^triLt"^' "    ^  *^ 

«  Ind.  Mnt.  Pep.  Co.     Central  Mut.   ^""^S^^ilSif  ^ 
Dep.  Co.,  23  Kv  £  R  2047  •  rr  o  w    u  1  .  Bo"!*'  Company  c. 

1^;  P.  T.  s.'S:  12.  VI  T!kt  m  St r.^-  ^" 

£00. 584.  57-       T  1.    TT  -.^ 

•  State  ««».r.*I«G«a..M  Mo.  S66.    673  ^"  ^  G«. 

Iowa.  592  ;  65  N.  W. 837 ;  Higgi«. Co.      Co...  ^i^Xw^Vs')  ^ 

15 


It  mast  be  remembered  that  articles  of  association  under  nneral 
acts  are  the  productions  of  private  citizens  gotten  ap  in  the  ^ten»t 
of  the  parties  who  propose  to  beeome  incorporated,  and  who  are 
8t.mulatedb7  th«r  zeal  for  penonal  advantage  rather  than  for  the 
^eral  good.   They  are,  so  far  as  permitted  in  accordance  with 
the  law.  sobetitutes  for  legislative  action  in  the  place  of  the  will 
of  the  people  of  the  State  as  formerly  expressed  bj  acta  of  the 
eg.slature.   WhUe  it  waa  tme  at  one  time  that  aU  granto  from 
the  Stat«  to  corporationa  werettrictljeonttmed,  this  principle  has 
been  subject  to  oonaideraWe  modification  of  late  years.   This  is 
owing  to  the  passage  of  general  incorporation  acts  which  were  un- 
donbtedly  framed  and  passed  with  the  intent  to  liberalize  the  law 
in  respect  to  such  grants.* 

« It  is  fundamenba  that  a  corporation  can  be  craated  and  exist 
onlj  br  statntoiT  anthority,«,d  if  a  corporation  organizes  under 
a  genena  act  and  inserts  in  its  articles  of  incorporation  reeula- 
tions  and  provisions  additional  to  those  required  by  the  crratire 
statute  such  additional  regulations  and  priyilegea  a»  ToidaMe  at 
the  will  of  the  State,  nor  is  the  corporation  permitted  to  place  any 
restnctions  on  the  mamier  of  exercising  its  corporate  duties  other 
than  the  statate-proTides.  If  the  corporation  claims  the  right  to 
cxwt  for  a  certain  purpose,  it  must  show  that  it  was  organized 
nnder  a  statute  authorizing  the  creation  of  a  oofporation  for  that 
particular  purpose."  * 

The  statutes  of  tiie  Tarioos  State,  differ  of  course  with  respect 
to  the  character  of  the  purposes  for  which  corporations  may  be 
formed.  Some  of  fliem  permit  incorporation  for  any  lawful  busi- 
ness, without  any  limitations  whatsoever.  The  phrase  "t^er 
lawful  business,"  found  in  so  many  of  the  statutes,  is,  according  to 
the  weight  of  authority,  held  not  to  be  snbject  to  the  nosdtur  a 
«»«»  rule,  «,d  is  n«Hl  M  a  "cateh^U"  for  the  purpose  of  includ- 

pecuniary  profit  not  otherwise  pro- 
vided for »  In  setting  out  the  purposes,  this  must  be  done  with 
reasonable  certainty  and  deEniteness.  F«k  example,  an  appli- 
cation  for  a  charter  was  nfosed  in  Pennsylvania,  where  it  was 
•tated  that,  m  addition  to  oertun  enumerated  objects,  the 

2  J  A'      »    ,  ^        _  Ji.  W.  481;  Green  v.  Breard.  35  La  An 


CHAP.  I.] 


BBAPTINO  THE  CHARTER, 


§4 


porations  may  be  Oroatod    !»  li  ^^^""^ 
or  lawful  entirprir^L? >  ^^^^^^^  business 

ful  b««nr^TlrkattT\  "      """"^  ^ 
b-iness.  lncl^":iZX^^^ 
any  purpose  for  which  individuals  may  Z^^te^^  t™** 
Connecticut  for  the  trammction  of  ^  fe^'^^, 
ware  for  the  tn«»action  of  anv  laS  h,!^°^  T' 
conduct  any  legitimate  object  or  0^1'"^^^^^^ 
lumbia  any  enterorisp  nr  1..  •         ,f '   ^  *be  District. of  Co- 

ducted  by  anTndTS  e,cr  r  ""^  ^  ^"^^^  con- 

In  Florid'  for  tltHS^'^^'  ?fj^'  -''-^'J- 
for  auy  purpose  iniJ^^Z ^Z^^^^^^^^^^^  «-'«ia 
purpose  for  which  individuals  ma v  l!  wf  T  ^^^^  ""^ 

In  lUinois  for  any  lawM  purpose  ^"/f  them^dves. 
tion  of  any  kind  Ji  minin^  m^rZ'ti  J  ,k 

ing  business ;  also  grain  de^^^  ""^^  "^nnfactur- 

companies.  In  lowff^  t^LZ^"  '*T^  transit 
m  Kansas  for  the  t^^o 

mming.  chemical,  and  mercantile  buiine«  ll  T'^T?^' 
the  transaction  of  any  lawful  hnain^  f '  °  ^entacky  for 
any  legitimate  object  oVpurS^^'^rw  >  "O"^-* 
of  any  lawful  business.  ex^J-t^uu-""**  transaction 
transaction  of  any  f^'^^'       Maine  for  the 

action  of  any  S  of»l^         '       ^'''y^''''^  tinnt 

cantile  busll:  1^  fT  ThLur'^^^^  ''^'^^  ^'^^ 
-^^forthetran:,orUt-^;:^'£^«;-^  ^^-^al  purposes, 
mining  corporation.  In  lfai^f^^*^'"^T"'-t""'>gor 
except  to  buy  or  seU  real  estate 

eating  liq„,i.  i„  ]Si^  w  Vh°  ?       "'"'"^''ctun,  inC 

«  Mionigan  for  the  transaction  of  any  lawful 


a  S*«Hoghei».OoiB,»By,S«Ma.8l8. 

17 


54  INCOBPOBATION  AND  OBGAKIZAIION  OP  OOBPOBAIIOHS.    [PAOT  L 

be  carried  on  by  the  same  corporation.   In  Minnesota  for  tho 

p«rpo8e.    In  Mwsoan  for  any  purpose  intended  for  profit  or 

nnng,  mm  ng,  cl.em.cal,  or  mercantile  business,  or  for  any  lawfnl 
com-neroul  or  .ndustrial  business,  or  foroarryLgon  ^njhr^^i 
of  busmess  designed  to  aid  in  or  protect  the  interests  of  tS 
company.   In  Neb«dc.  for  the  transaction  of  a,"    Iw  ul  busf 

''"^  •"•^""'^  -  busin/ss,  com 

r/r*'""       ""^^  ^^'^P^'^'^^  transaction^? 
any  la ^.ful  business.    In  New  Jersey  for  anr  lawfd  purp^  or 

mg  or  other  mdustnal  purposes.  In  New  York  for  anv  lawful 
parpoee  or  purpo««.  I„  North  Carolina  for  en^a^in"  in  ani 
lawfnl  bnsmess.  In  North  Dakota  for  any  purpose  for  kich  ° - 
d.ndaals  may  lawfully  associate  themselves.  In  OhL  for 
purpose  for  which  individuals  may  lawfully  associate  theivt' 
except  for  carrymg  on  .  professional  business.  In  Oklahoma  f'; 
««n,ng,  manufacturing  or  other  industrial  purposes.  I„  XLo. 
for  the  purpose  of  engaging  in  any  lawful  enterprise.  busiS 
pnrsmt  or  occupation.    In  Pennsylvania  for  the  t«n«cZ^ 

In  Rhode  Island  to  cany  on  any  oniinary  business.    In  South 
Carolma  for  any  purpose  or  purposes  whatsoever  or  two  or  more 
combmed.    In  South  Dakota  for  the  transaction  of  any  M 
bnsmess    I„  Tennessee  for  the  trade  of  the  merchants,  and  for 
mmn.g  bormg,  manufacturing,  and  other  specified  purposes  In 
Texas  for  manufacturing  or  mining  and  the  purchase  of  goods 
wares,  and  merchandise ;  abo  for  buying  and  selling  a<rriculturai 
products  and  for  other  specified  purpose!.    I„  Utah^foCy  p"?! 
pose  for  which  individuals  may  lawfully  associate  themseWes 
fa  Vermont  for  carrying  on  any  object  or  business  not  repugnant 
to  public  policy  or  the  laws  of  the  State.    In  Vii^pnia  for  any  pur- 
winch  may  be  lawfully  omidncted  by  individuals  or  by  a  bod  v 
polrt.c  and  corporate.   In  Washington  for  any  trade  or  b'usiness! 
in  West  Virginia  for  any  purpose  or  business  useful  to  the  public 
for  which  a  firm  or  copartnership  may  be  lawfully  formed  In 
W,scons,n  for  any  lawful  business  or  purpose  whaterer  I^ 
Wyoming  for  the  transaction  of  «.y  kind  of  manufacturing 


CHAP.  I.] 


DRAFTING  THE  CHABTBB, 


§5 


mining,  mercantile,  and  cfaemicai  business  or  any  business  designed 
to  aid  in  the  industrial  or  productive  interests  of  the  country. 

The  foregoing  enumeration  of  purposes  for  which  corporations 
may  be  created  in  the  various  Commonwealths  named  above, 
should  be  qualiaed  by  the  statement  that  in  most  of  them  special 
acts  are  provided  for  certain  classes  of  corporations,  such  as 
banks,  trust  companies,  insurance  companies,  etc.,  under  which 
corporations  of  that  character  must  be  incorporated.  Among  the 
few  States  in  which  corporations  may  be  created  for  any  lawfdl 
purpose  whatever  including  the  excepted  classes  above  referred 
to  are  Alabama,  Virginia,  and  West  Virginia. 

Finally,  attention  is  called  to  the  fact  that  in  some  few  of 
the  Commonwealths  the  statutes  require  that  the  certidcate  set 
forth  the  particular  trade  to  be  carried  on.  Such  a  provision  is 
in  legal  effect  equivalent  to  requiring  that  the  purpose  or  object 
of  the  proposed  corporation  be  set  forth. 

§  5.  Number  of  Corporate  Purposes  Permitted.  —  Difficulty  fre- 
quently arises  in  determining  whether  under  the  provisions  of 
some  particular  business  corpomtion  act  parties  may  incorporate 
for  the  transaction  of  more  than  one  line  of  business.   In  some 
of  the  States,  notdily,  Alabama,  Connecticut,  Delaware,  Maine, 
Massachusetts,  Nevada,  New  Jersey,  New  York,  North  Carolina' 
Virginia,  and  West  Virginia,  the  acts  are  so  framed  as  to  clearly 
authorize  incorporation  of  companies  for  any  number  of  purposes 
not  covered  by  special  acts.  In  aU  the  remaining  States,  with  the 
exception  of  District  of  Columbia,  Indiana,  Kansas,  Louisiana, 
Michigan,  Missouri,  Ohio,  Pennsylvania,  Tennessee,  Texas,  and 
Wyoming,  the  matter  is  greatly  simplified  by  State  officials  con- 
struing the  statutes  of  their  respective  States  to  permit  the  incor- 
poration  of  companies  for  the  transaction  of  any  number  of  lines 
of  business  not  regulated  by  special  statutes. 

In  Georgia,  Indiana,  Maryland,  Michigan,  Pennsylvania,  Tenn- 
essee, and  Texas  the  different  lines  of  business  are  divided  into 
classes.  Generally  speaking,  parties  are  not  permitted  to  incor- 
porate for  lines  of  business  included  in  more  than  one  of  these 
classes.!  In  Wyoming  the  law  requires  the  certificate  of  incor- 
poration  to  have  but  one  general  object.  In  Ohio  only  one 
purpose  may  be  inserted.  In  Kansas  and  Missouri  the  number  of 
purposes  is  only  limited  by  the  provision  of  law  that  the  name  of 

^  The  rote  is  otewiM  in  liidmaa  and  Muylaiid. 

19 


§  6  mOOBFORAflOK  AMD  OIlGANmTION  OF  COBPOBATIONS.   [PART  I. 

the  corporation  shall  indicate  the  nature  of  the  business  to  be 
carried  on  by  it 

Some  suggestions  along  the  line  of  determining  the  question  as 
to  the  number  of  purposes  which  may  be  inserted  in  articles  of 
incorporation  in  any  particular  States  may  be  here  presented, 
Where  the  statute  permits  corporations  to  be  formed  for  several 
purposes  named  in  the  alternative,  separated  by  the  disjunctive 
conjunction  "  or,"  it  is  lield  that  a  corporation  cannot  be  organized 
thereunder  for  more  than  one  of  suph  purposes,  and  that  articles 
of  incorporation  which  include  more  than  one  of  them  are  rdd, 
and  that  inccM7(»ation  under  them  will  be  refused.^ 

Again,  it  would  af^r  that  where  incorporation  for  only  one 
purpose  is  permitted,  incorporators  must  make  a  choice  of  such 
purpose  themselves  in  the  first  instance,  for  the  courts  have  quite 
generally  refused  to  make  it  for  them.* 

On  this  general  subject  the  Supreme  Court  of  Texas  in  a  recent 
ease  spoke  as  follows:    A  charter  must  set  forth  the  purpose  for 
which  it  is  formed.   This  for  the  reason  that  if  it  had  been  in- 
tended that  a  corporation  might  be  created  for  two  or  more  of  the 
purposes  specified  in  the  statute,  it  would  have  been  proper  to 
have  stated  '  purpose  or  purposes  for  which  it  is  formed.*  The 
use  of  the  word  <  purpose '  in  the  singular  number  tends  to  show 
that  it  was  the  intention  of  the  legislature  to  authorize  the 
creation  of  a  corporation  for  only  one  purpose.    It  may  be  true 
that  the  use  of  the  singular  number  may  not  be  the  conclusion  of 
the  question,  and  that  if  there  were  other  purposes  in  the  act 
which  either  by  express  dedaraticm  or  clear  implication  indicate 
that  it  was  intended  to  authorize  incorporation  for  two  or  more  of 
the  designated  purposes,  whether  in  the  same  subdivision  or  not 
we  should  so  hold.'  ' 

Finally,  it  may  be  said  that  unless  tiie  statute  expressly  or 
impliedly  permits  the  insertion  of  more  than  one  purpose  in  the 
articles,  the  insertion  of  two  or  more  purposes  therein  will  clearly 
justify  State  officials  in  refusing  to  allow  the  filing  of  tiie  same.* 

1  State  V.  Beck,  81  Ind.  500;  Inn       «  BaiDMf  v.  Tod,  95  TesM,  614-  69 

John  H.  Deveaux  et  a/.,  54  Ga.  673.  S.  W.  133.  ' 

«  WflfianM  V.  Company,  25  Ind.  Ap.       *  lud.  Bond  Co.  v.  O^le,  22  Lid  An 

Ml ;  57  N.  B.  581 ;  Bayou  Cook  N.y.  &  593;  54  N.  E.  407;  Woodberry  v.  Mc- 

(I*.),  85  So.  Chug.  78  MiM.  831;  29  So.  514;  Kins- 

TT  o        1 1  C«"^Pany»  1«0  ton,  etc.  Co.  v.  Stroud,  13S  N.  C.  418: 

U.  S.  1 ;  9  S.  Ct.  409 ;  State  ».  CompMiy,  43  S.  B.  9. 
88  Wi«.512;  60N.  W.  796. 

20 


CHAP.  I.] 


DRAFTING  THE  CHABTEB. 


§6 


§  6.  Collateral  Attack  upon  Coiporata  PuipoaM  and  Powon.  — 

The  term  collateral  attack,"  as  used  in  corporation  law,  has 
reference  to  the  attempt  of  parties  other  than  the  State  (in  direct 
proceedings)  to  question  the  validity  of  a  corporation's  existence 
and  purposes  or  its  riglit  to  exercise  corporate  powers.  The  law 
reports  are  full  of  conflicting  decisions  relating  to  the  general 
subject  of  collateral  attack  upon  corporate  existence,  purposes, 
and  powers.  The  seemingly  hopeless  confusion  which  exists 
among  the  courts  on  this  subject  is  largely  due  to  a  failure  on 
their  part  to  recognize  that  the  matter  has,  by  a  gradual  process 
of  statutory  and  judicial  legislation,  become  at  the  present  time 
an  academic  one.  It  is  proposed  at  this  point  to  discuss  at 
length  not  only  the  question  of  the  right  to  collaterally  attack 
the  legality  of  corporate  purposes  as  set  forth  in  articles  of  incor- 
poration, but  as  well  to  consider  in  this  same  connection  the  right 
to  collaterally  attack  the  validity  of  corporate  existence  and  the 
right  to  exercise  corporate  powers.  This  for  the  reascm  that  all 
these  questions  are  so  closely  related  to  each  othi^  as  to  properly 
permit  of  discussion  at  one  and  the  same  time. 

At  the  outset,  a  word  should  be  said  as  to  the  policy  that  would 
seem  to  dictate  the  establishment  of  statutory  and  judicial  rules, 
forbidding  the  impeachment  by  indirect  methods  of  a  corpora- 
tion's right  to  exist.  In  the  first  place,  such  attacks  are  rar^j 
made  except  in  an  attempt  to  defeat  the  ends  of  justice,  by 
setting  up  defences  to  actions  brought  against  debtors  by  cor- 
porations, in  which  the  parties  interposing  the  same  have  generally 
no  direct  interest  whatever.  If  the  State  legislatures  had  not  bj 
legislation,  and  the  courts  by  an  extended  application  of  the  doc- 
trine of  estoppel,  forbidden  such  collateral  inquiry  into  these 
matters,  it  would  have  been  impossible  in  a  great  number  of  cases 
for  litigants  to  enforce  their  just  rights  in  courts  of  law.  If  such 
a  right  were  admitted  in  one  case,  it  must  be  in  all.  Corpora- 
tions might  thus  be  called  upon  years  after  their  ereation  to  es- 
tablish the  validity  of  corporate  existence,  purposes,  and  powers, 
which  public  policy  should  hold  to  be  valid  as  against  all  parties 
except  the  State.* 

Having  already  observed  that  the  question  of  the  right  to  col- 
laterally attack  corporate  existence,  purposes,  and  powers  has 
become  largely  an  academie  one,  it  will  now  be  proper  to  mh* 

1  Dnggan  v.  ComjMuiy,  11  Col.  113;  17  Pac.  105. 

21 


4 


§  6   INCOBPORATIOH  AMD  OBOiJUZATiaN  OF  CCMtPOBATIONS.    [PART  I. 

stantiate  this  statement  That  the  discussion  of  this  question 
may  proceed  along  logical  lines,  attention  is  first  called  to  the 
alleged  right  to  collaterally  attack  the  validity  of  corporate 
existence. 

In  twenty-six  of  the  States  and  Territories  collateral  inquiry 
into  the  legality  of  corporate  existence  is  expressly  forbidden  by 
statute,  the  right  to  impeach  such  existence  being  expressly  re- 
served to  the  State  alone  by  means  of  direct  proceedings  brought 
for  that  purpose.^  Thus,  in  California  it  is  provided  that  where 
a  corporation  claims  in  good  faith  to  be  a  corporation  and  doing 
business  as  sudi,  its  right  to  exercise  corporate  powers  shall  not 
be  inquired  into  collaterally  in  any  private  suit  to  which  such 
de  facto  corporation  may  be  a  party. 

In  Delaware  the  law  provides  "that  no  corporation  shall  be 
permitted  to  set  up  or  rely  upon  the  want  of  legal  organization  as 
a  defence  in  any  acti<m  agiunst  it,  nor  shall  any  person  transact- 
ing business  with  such  corporation,  or  sued  for  injury  to  its  prop- 
erty be  permitted  to  rely  upon  such  want  of  legal  organization  as 
a  defence."  In  Georgia  the  law  provides  that  the  existence  of  a 
corporation  claiming  a  charter,  under  the  color  of  law,  cannot  be 
collaterally  attacked,  and  that  all  who  dealt  with  the  corporation 
as  such  are  estopped  from  denying  its  corporate  existence.  In 
Iowa,  Kentucky,  and  Nebraska  statutes  exist  essentially  the  same 
as  that  in  force  in  Delaware  as  cited  above.  In  Nebraska  the  law 
provides  that  evidence  that  the  corporation  is  doing  business 
under  a  certain  name  shall  be  prima  facie  proof  of  its  diie  incor- 
poration or  existence  pursuant  to  law. 

In  Montana  collateral  inquiry  into  corporate  existence  is  ex- 
pressly forbidden,  until  the  fact  that  there  was  in  fact  no  such  cor- 
poration has  been  adjudged  in  a  direct  proceeding  brought  for 
that  purpose.  In  South  Carolina,  it  is  provided  that  no  irregu- 
larity shall  be  held  to  vitiate  the  corporation  until  a  direct  pro- 
ceedilig  to  set  aside  or  annul  the  charter  be  commenced  by  the 
proper  authorities  of  the  State,  and  all  acts  and  contracts  entered 
into  shall  have  the  same  force  and  effect  as  if  no  irregularity  existed. 

In  South  Dakota,  North  Dakota,  and  Oklahoma  the  law  provides 
that  the  due  incorporation  of  any  company  claiming  in  good  faith 
to  be  a  corporation  and  doing  business  as  such,  its  right  to  exer- 

1  See  Part  III.  Table  3,  page  573 ;  see  M.  W.  B.  Co.  v.  SnpoiTiaofs,  64  CaL  69  j 
alio  Boyce  v.  Chwch,  46  Md.  359;  W.  &  S8  Pae.  496. 

22 


CHAP.  I.] 


DRAFTING  THE  C&ABTBB. 


§6 


cise  corporate  powers  shall  not  be  inquired  into  collaterally.  In 
Tennessee  the  law  provides  that  the  validity  of  corporate  existence 
shall  not  be  collaterally  questioned.  Persons  acting  as  a  corpora- 
tion, the  law  says,  will  be  presumed  to  be  legally  incorporated  un- 
til the  contrary  is  shown,  and  no  such  franchise  shall  be  declared 
annulled  or  forfeited  ex<5eipt  in  a  regular  proceeding  brought  for 
that  purpose.  In  Texas  no  person  who  shall  have  assumed  an 
obligation  to  an  ostensible  corporation  as  such  shall  resist  the 
enforcement  of  such  obligation  on  the  ground  that  there  was  no 
such  corporation  until  that  fact  has  been  adjudged  in  a  direct 
proceeding  for  that  purpose. 

In  Arizona  persons  acting  as  a  corporation  under  the  provisions 
of  the  incorporation  act  in  force  in  that  Territory  are  by  law  pre- 
sumed to  be  legally  organized  until  the  contrary  is  shown,  and  no 
franchise  can  be  declared  to  be  annulled  or  forfeited  except  in  reg- 
ular proceedings  brought  for  that  purpose.  The  law  also  provides 
that  no  persons  acting  as  a  corporation  i^ider  such  act  shall  be  per- 
mitted to  set  up  or  rely  upon  the  want  of  legal  organization  as  a 
defence  to  any  action  brought  against  them  as  a  corporation,  nor 
shall  any  person  who  shall  be  sued  under  a  contract  made  with 
such  corporation  sue  for  an  injury  done  to  its  property  or  for  a 
wrong  done  to  its  interest  be  permitted  to  rely  upon  such  want  of 
legal  organization  in  his  defence. 

Finally,  in  Mississippi  it  is  provided  that  it  shall  not  be  a  defence 
in  any  action  against  a  corporation  that  there  was  a  defect  or  in- 
formality in  its  organization. 

Again  in  twenty-nine  of  the  States  authority  is  given  to  State 
officials  to  issue  certificates  of  due  incorporation.^  Of  this  number 
fourteen  are  not  included  in  the  list  of  States  forbidding  collateral 
attacks  upon  corporate  existence.  In  such  States  it  is  safe  to  say 
that  tlie  issue  of  such  a  certificate  is  in  itself  a  final  adjudication 
against  all  parties  except  the  State  that  a  corporation  has  a  legal 
existence  to  the  extent  that  it  cannot  be  coUaterally  attacked  by 
third  parties.  Particularly  where  it  is  organized  by  the  voluntary 
action  of  the  requisite  number  of  incorporators  with  the  approval 
and  consent  of  an  officer  of  the  State  possessing  authority  in  the 
premises,  under  an  enabling  statute  permitting  corporations  of 
that  particular  description  to  be  organized  thereunder.^ 

1  See  Part  m.  Table  3,  page  573.  ^  O'Brien  v.  Cummings,  13  Mo.  Ap. 

197 ;  Bojce  v.  Church,  46  Md.  359. 

23 


I  6  raCOBPOBAHON  and  OBGANIZATION  of  OOBPORATIOira.   [PAW  I. 

The  theory  upon  which  the  rule  here  stated  is  based  Mem.  to  be 
tti  State  officii  in  isBuing  a  certificate  of  due  mcorporat.on  act 
mider  a  general  iUtuto  pawed  by  the  legislature,  and  under  the 
:ert  L'^Tbecon.e  agSTL  it  we«.  thereof  for  that  purpoj,. 

It  therefore  follows  that  the  act  of  ^^^^^^ Z^r^ 
ing  .8  to  due  incorporation,  is  in  effect  the  act  of  the  legid^ure 

which  ha.  the  .npreme  power  of  '^^f'^^^'^'^''''''^^^^^^^ 
may  be  «»fely  ««d  that,  according  to  the  best  current  of  authority, 
Sre  the  stLte  give,  the  State  official  autjonty  «^ 
tificate  of  due  incorporation,  such  certificate  i.  evidence  thereof 
atrainst  all  the  world  except  the  State.*  ,  ^  ^,„,.- 
Again  it  should  be  noted  that  in  ,mny  of  the  States  the  rtatute 
itMlfeive.  certain  probative  force  to  the  charter  so  issued,  by  provid- 
Sr^^fi^to  of  inc«rpor.tion,or  a  certified  copy  thereof 

,;:,1  be  evidence  to  a  certain  ^«'«n«*t'^*  tori^DlLl 
purposes.  Thus  in  Connecticut,  Kansas,  Minnewta,  North  Dakota, 
L  Ohio  statute,  exist  providing  that  a  certified  copy  <rf  tto 
tificate  of  incorporation  diaU  be  prima  facie  evidence  of  the  legal 
distance  of  ftT^rporation.   In  Colorado,  Ok  ahoma  (^^gon 
Texas,  West  Virginia,  and  Wyoming rtatnte.  provide  that  such  cer- 
tificate shall  be  evidence  of  the  existence  of  the  ^^y.  InCaU 
ifomia,  ■  Colorado,  Idaho,  Illinois,  Louisiana  Montana,  Nevada 
North  Dakota,  South  Dakota,  Oklahoma,  Utah,  Washing  on  and 
W^ing  «.ck  .  certificate  i.  prima  facie  evidence  of  the  act 
therein  stated.   In  New  York  the  certifi«ite  of  incorporation  of  any 

corporation  when  duly  filed  is  P^^V^"^  r^^  Ll^^ 
Dorltion.   In  Arkansas  a  certified  copy  of  the  art.de.  i.  made 
•  ^  facU  evidence  of  the  due  formation  and  of  the  existence 
and  capacity  of  the  corporation. 

I  Petty  ».  Harden,  lis  Iowa,  212 ;  88 
K  W.  339;  Cochran  v.  Arnold,  58  Pa.  St. 
399 ;  LitchieW  Bank  i..  Chnrch,  29  Conn. 
157;  Napier  v.  Foe,  12  Ga.  170;  Caro- 
lina Iron  Co.  V.  Abernathey,  94  N.  C.  545; 
Casey  v.  GaUi,  94  U.  S.  673;  M  I*  B- 1^ 
307 ;  Lake  Sup.  S»T.  Ca  ».  Morrison,  21 

C.  C.  C.  P.  »17j  Bird*  Cna,  1  Simon 

f>.  8.),  47 ;  40  Eng.  Cli.  47 ;  In  re  Ba,rueds 

BOoiT  Co..  L.  R.  2  Ch.  674;  O'Bnen  ^. 

Cmmninga,  13  Mo.  Ap.  197;  N.  P.  C.  I. 

Co.  V.  Company,  16  Utali,  246 ;  52  F»c 

168;  Holman  ».  State,  106  I^- J***  ' 

H.  £.  702i  State  f.  Omt,  S  B.  H.  tUl; 

24 


In  Colorado  it  is  made  evidence 

Jones  V.  Dana,  24  Barb.  395;  Taylor  v. 
Company,  91  Me.  193;  39  Atl.  560 ;  Finch 
V.  Ullman,  105  Mo  255;  Saanden  v. 
Farmer,  62  N.  H.  57S ;  Uoioo  Wtter  Co.  v, 
Kean,  68  N.  J.  Eq.  Ill ;  27  Atl.  101.5 ; 
U.  S.  Vinegar  Co.  v.  Schlegel,  143  N.  ^  • 
537 ;  38  N.  E.  729 ;  W.  &  P.  Ry.  Co. 
V.  Company,  114  N.  C.  690;  19  S.  E. 
646 ;  Carroll  v.  Bank,  19  Wash.  639  ;  54 
Pac.  32 ;  Vermont,  etc.  Ry.  Co.  v.  Com- 
pany, 34  Vt.  a;  Gruhh  r.  Company,  14 
Pa.  St.  805;  W.P.B.  Co.  p.  Yowig,  12 
Md.476. 


CHAP.  I.] 


DBAFTINO  fSE  CHABTEB, 


of  the  existence  of  the  corpomtioii.  In  Connecticnt  it  is  evidence 
of  the  legal  existence  of  ihe  corporation,  and  Jt  is  there  provided 
that  it  shall  serve  all  the  purposes  of  a  charter  for  the  corporation. 
In  Delaware  it  is  made  evidence  in  any  court  of  law  or  equity. 
In  Georgia  a  certified  copy  of  the  petition  for  incorporation  and 
order  granting  the  same  is  made  evidence  of  snch  incorporation 
in  any  conrt.  In  Eentncky  the.law  provides  that  it  may  be  used 
as  evidence  in  any  action  for  or  against  the  corporation.  In 
Maryland  it  may  be  used  as  evidence  in  all  legal  proceedings.  In 
Michigan  it  is  prima  facie  evidence  of  the  due  formation,  exist- 
ence, and  capacity  of  sndi  eorporation.  In  Minnesota  it  is  pro- 
vided that  it  shall  be  evidence  in  ail  courts  of  snch  incorporation. 
In  New  Jersey  it  is  evidence  in  all  courts  and  places.  In  North 
Carolina  it  is  prima  facie  evidence  of  the  organization  and  incor- 
poration of  the  company  purporting  thereby  to  have  been  estab- 
lished. In  Pennsylvania  it  is  evidence  for  all  purposes.  In  Rhode 
Island  a  certificate  must  be  received  in  evid^ce  before  any  ooart, 
tribunal,  or  authority.  In  Tennessee  it  is  competent  evidence  in 
any  proceeding.  In  West  Virginia  it  shall  be  received  as  evidence 
of  the  existence  of  the  corporation.  In  Wyoming  it  is  provided 
that  it  shall  be  evidence  of  the  existence  of  the  company. 

Again,  in  Massachusetts  and  Indiana  the  law  provides  that  the 
certificate  of  record  shall  be  conclusive  evidence  of  the  ezlst^iGe  of 
such  corporation.  In  Wisconsin  it  must  be  received  as  conclusive 
evidence  of  the  existence  of  the  corporation  or  of  the  organization 
thereof  in  all  cases  where  such  facts  are  collaterally  involved. 

Again,  in  Alabama  tiie  certificate  of  the  probate  judge  states 
specifically  that  the  incorporators  are  duly  organised  as  a  corpora- 
tion for  the  purposes  expressed  in  the  declaration,  having  the 
power,  capacity,  and  authority  conferred  by  law.  In  Florida  the 
law  provides  that letters  patent "  shall  be  conclusive  evidence  of 
the  existence  of  the  corporation  in  all  actions  where  i^e  question 
of  the  existence  is  only  collaterally  involved,  and  prima  faeie  evi- 
dence in  all  other  actions  and  proceedings.  In  Indiana  the  order 
of  the  court  declaring  the  existence  of  a  corporation  entered  "  ex 
parte  "  is  conclusive  as  to  the  fact  of  such  existence.  In  Missis- 
sippi the  law  provides  that  the  powers  specified  in  the  charter 
shall  by  the  approval  of  the  Governor  be  vested  in  snch  corpora- 
tion, and  it  shall  go  into  operation  at  the  time  and  on  the  terms 
and  conditions  specified. 

25 


§  6    INCORPORATION  AND  ORGANIZATION  OP  CORPORATIONS.   [PART  I. 

Again,  certain  statutes  exist  providing  that  after  certain  pre- 
liminary steps  have  been  taken  as  prescribed  by  statute  such 
incorporators  and  their  successors  and  assigns  shall  thereupon 
become  a  body  politic  and  corporate  for  certain  specified  purposes. 
These  statutes  really  provide  that  upon  the  observance  of  certain 
specified  preliminary  conditions  relative  to  the*  making  and  execu- 
tion of  articles  of  incorporation,  the  incorporators,  their  suc- 
cessors and  assigns,  shall  be  a  body  politic  and  corporate  under  the 
name  and  for  the  purposes  stated  in  the  articles.  The  foregoing  is 
the  statutory  provision  as  it  exists  to-day  in  substance  in  Soutii  Da- 
kota, North  Dakota,  and  Oklahoma.  In  Virginia  the  law  provides 
that  they  shall  be  a  body  politic  and  corporate  by  the  name  set 
forth  in  the  said  certificate  and  upon  the  terms  and  powers  set  forth 
therein,  so  far  as  not  in  conflict  with  law.  In  Pennsylvania  the 
law  provides  that  they  shall  become  a  corporation  upon  the  pur- 
poses and  terms  named  in  the  charter.  In  Maryland  they  are 
declared  to  thereby  become  a  body  politic  and  corporate  according 
to  the  objects,  purposes,  articles,  conditions,  and  provisions  in  said 
Instrument  contained.  In  Maine  they  are  declared  to  be  a  corpo- 
ration, with  all  the  rights  and  powers  and  subject  to  all  the  duties, 
obligations,  and  liabilities  provided  by  law. 

In  Connecticut  a  copy  of  the  certificate  of  organization  is  prima 
facie  evidence  that  the  corporation  has  been  duly  organized  and 
is  duly  authorized  to  exercise  all  its  corporate  powers.  In  Maine 
the  certificate  of  the  Secretary  of  State  that  the  corporation  hus 
been  duly  organized  is  evidence  of  the  corporate  existence  of  the 
corporation.  In  South  Carolina  a  certificate  is  issued  by  the  Sec- 
retary of  State  that  the  corporation  is  fully  authorized  to  com- 
mence business  under  its  charter  for  the  purposes  indicated  in 
the  written  declaration  of  the  incorporators. 

It  is  not  claimed  that  the  i^tatotorj  provisions  here  referred  to 
operate  so  as  to  preclude  entirely  collateral  attack  upon  corpo- 
rate existence,  purposes,  and  powers.  The  most  that  is  claimed 
for  them  where  they  do  not  make  certain  instruments  conclusive 
evidence  of  corporate  existence,  purposes,  and  powers,  is  that  they 
shift  the  burden  of  proof  and  render  the  likelihood  of  collateral 
attack  more  remote.^ 

1  As  to  meaning  of  condnsiye  efyidoice,  of  prima  fade  evidence,  see  Holmes  v.  Gflc 
lee  Ameriean  Order,  ete.  v.  Menifet,  151  lUand,  41  Barb.  (S,  T.)  569;  Knapp.  etc. 
HaM.  558;  24N.E.918.  AatoMiiiiiig  Co.  v.  8tiaiid,4  Waf^  Mi;  SOFte.  1063; 

26 


CHAP.  I.] 


nBAFTING  TOE  CHARTER. 


§6 


It  has  now  been  fairly  demonstrated,  it  is  hoped,  that  in  tlie 
majority  of  the  Commonwealths  collateral  inquiry  into  corporate 
existence  is  either  prohibited  by  statute  or  else  is  forbidden  by 
implication,  by  reason  of  the  issuance  of  certificates  of  due"  in- 
corporation, under  proper  legislative  authority,  by  State  officials. 
In  the  few  remaining  States  and  Territories  the  courts  have  either 
by  a  process  of  judicial  legislation  or  by  an  extended  application 
of  the  principle  of  estoppel,  practically  made  it  impossible  to 
successfully  attack  in  collateral  proceedings  the  due  existence 
of  a  corporation.    This  on  grounds  of  enlightened  public  policy.* 
The  judicial  legislation  above  referred  to  covers  the  cases  where 
it  is  impossible  to  apply  principles  of  estoppel  either  on  account 
of  the  absence  of  any  conduct  on  the  part  of  parties  litigant  show- 
ing their  recognition  of  the  corporation's  existence,  or  else  is 
inapplicable  by  reason  of  such  parties  havmg  never  in  any  way 
dealt  with  the  corporation  or  recognized  ito  corporate  existence.^ 
Having  now  considered  at  some  length  the  question  as  to  the 
right  to  collaterally  attack  the  validity  of  corporate  existence, 
there  naturally  follows  an  inquiry  as  to  the  right  to  attack  the 
validity  of  corporate  purposes  and  powers  when  the  same  are  in- 
serted in  the  articles  of  incorporation.   It  would  seem  to  follow, 
as  a  logical  sequence,  that  if  the  rule  be  once  established  forbid- 
ding collateral  attack  upon  corporate  existence,  this  same  rule 
should  operate  as  well  to  prevent  collateral  attack  upon  corporate 
purposes  and  powers.    This  for  the  reason  that  if  a  corporation 
exists  at  all  it  must  necessarily  exist  with  such  purposes  and 
powers  as  are  inserted  in  the  articles  of  incorporation  which 
called  the  corporation  into  being. 

As  has  already  been  observed,  a  large  number  of  the  States  have 
enacted  statutes  forbidding  collateral  attack  upon  corporate  exist- 
ence.  For  the  reasons  already  stated,  it  would  appear  that  these 
stotutes  would  be  equally  efficacious  for  the  purpose  of  prohibiting 
collateral  atteck  upon  corporate  purposes  and  powers. 

Eastern  Plank  Road  Co.  v.  Vaughan,  U  863;  Sannders  v.  Farmer,  62  N.  H.  57J- 

N.  Y.  546 ;  Bates  v.  Wilson,  U  Col.  140 ;  flackensack  Water  Co.  v.  DeKay  36  N  J 

!J        a!;  ^,7"P*°>''  ^6  Conn.  Eq.  548 ;  U.  S.  Vinegar  Co.  v.  Schlegei; 

87;  13  Att.  137;  JeweU  ».  Company,  101  143  N.  Y.  537;  38  N.  E.  729;  W.  &  P. 

il'  n  „.      rr  o  ^'  ^'  Company,  114  N.  C.  690;  19 

See  Casey  v.  Galli,  94  U.  S.  673 ;  Diigu  8.  E.  646 ;  Beynolda  v.  Myers.  51  Vt.  444 : 
gan  V.  Company,  11  Col.  113;  17  Pac.  Carroll  y  Bank,  19  Wash.  689  ;  54Pac82 
105  ;  McClinch  v.  Sturgis.  72  Me.  288;  2  gee  Marioa  Sayings  Bank  ».  Dnnkin.' 
rinch  V,  Ullman,  103  Mo.  255;  16  S.  W.  54  Ala.  471. 

27 


§  7   INCOBFOBATION  AND  0B6ANTZATI0K  OF  CXmPOBATIONS.  [PABT  I. 

Again,  as  has  already  been  stated,  a  large  number  of  the  in- 
corporation acts  provide  that  the  certificate  of  incorporation  shall 
be  issued  by  certain  designated  State  officials.  Where  such  cer- 
tificates are  issued  under  express  or  even  implied  authority  of  the 
State,  the  rule  unquesticmably  is  that  the  validity  of  corporate 
purposes  and  powers  not  per  $e  illegal,  inserted  in  the  articles  of 
incorporation,  cannot  be  attacked  except  by  the  State  in  a  direct 
proceeding  brought  for  that  purpose.^ 

If,  however,  the  charter  is  issued  without  the  express  or  im- 
plied approval  of  the  State  officials,— their  duty  being  merely  to 
certify  to  the  &ct  and  to  mark  them  when  filed  as  public  doenments 
in  their  respective  offices, — then  the  insertion  of  purposes  not 
authorized  by  the  statute,  yet  not  unlawful  per  se,  would  probably 
not  render  the  charter  valid  for  all  purposes  even  when  filed.^ 

To  sum  up  briefly  the  propositions  herein  presented,  it  may  be 
said  that  collateral  inquiry  into  the  l^ality  of  a  corporation's  ex- 
istence,  purposes,  and  powers  is  forbidden  in  this  country,  (1)  by 
statutes  expressly  forbidding  such  collateral  attack;  (2)  by 
reason  of  authority  vested  in  state  officials  to  issue  certificates  of 
due  incOTporation  which,  for  the  reasons  already  stated  are  not 
open  to  oolklml  attack;  (3)  by  reason  of  statutory  provi- 
sions ^ving  to  certified  copies  d  articles  of  incorporation  certain 
probative  effect ;  (4)  by  an  extended  application  of  the  principle 
of  estoppel  forbidding  such  collateral  attacks ;  (5)  by  a  process 
of  judicial  legislation  denying  on  grounds  of  public  policy  the  right 
of  parties  other  than  the  State  to  attack  the  legality  of  corporate 
existence,  purposes,  and  powers. 

§  7.  Effect  of  inMirting  Illegal  PmposM.  —  There  seems  to  be  a 
sound  basis  in  law  for  permitting  collateral  attack  upon  purposes 
that  are  illegal  per  ae.  This  for  the  reason  that  a  distinction 
clearly  mats  between  purposes  which  are  merely  unauthorized 

1  State  ex  rd.  Walker*.  Tdbot,  1S8  Ma  S9S ;  Cawjr  v.  GalH.  94  U.  S.  678;  Fovtiw 

•9;  f7  8.W.8M;I>ofef  V.  PttteiiOB,156  v.  Bank,  112  U.  S.  439;  5  S.  Ct.  234; 

lad.  SO}  56  K.  E.  668;  T.  A.  L.  Co.  v.  Niemeyer  v.  L.  U.  J.  Ry.,  43  Ark.  111. 
Mlimnj-  (Tenn.),  56  S.  W.  35;  AUbright      «  Willianja  v.  Company,  25  Ind.  A  p. 

V.  Association,  102  Pa.  St.  411.    See  also  351 ;  57  N.  E.  581 ;  Kiuston,  etc.  Co.  y. 

People  V.  Beach,  19  Hun,  259;  N.Orleans,  Stroud,  132  N.  C.  413;  43S.E.918;  Ram. 

etc.  R.  R.  Co.  W.Frank.  39  La.  An.  707;  ley  ».  Tod,  95  T«.  614 }  69&W.iaS;Or. 

S  8a  810;  Hoteei  v.  Offlilaiid,  41  Barb.  Bj.  k  Nar.  Co.  v.  Or.  Bj.  Co.,  180  U.  S. 

H.  T.  569;  Baifeeni  Plank  Road  Co.  v.  1 ;  9  S.  Ct.  409;  State  v.  Company,  88  Wis. 

Yai^^,  14  N.  Y.  546;  C.  &  P.  Co.  v.  512;  60  N.  W.  796  ;  G.  L.  H.  Im.  Co.  V. 

Secretary  of  State,  128  Mich.  621;  87  Hamper,  73  Ala.  325.. 
K.  W.  901 ;  Cochran  v,  Arnold,  58  Pa.  St 

28 


CHAP.  I.]  DBAfTING  THB  CHAITEB.  §  8 

by  the  terms  of  the  general  incorporaMon  act,  and  those  parpoees 
which  are  forbidden  by  express  statute,  —  civil  or  penal.  In  the 
latter  case  it  seems  clear  that  even  the  approval  by  a  State  official 
of  such  unlawful  purposes  as  evidenced  by  the  issuance  by  them 
of  certificates  of  due  incorporation,  do  not  forbid  collateral  attack 
thereon  in  any  suit  whereby  the  corporation  seeks  to  benefit  by 
the  insertion  of  sudi  unlawful  purposes  in  its  articles.^ 

The  rule  might  be  still  further  extended  so  as  to  apply  to  pur- 
poses which  may  be  lawful  in  a  general  way,  yet  which  may  be 
deemed  unlawful  on  account  of  the  limitations  inserted  in  the 
articles  upon  the  means  by  which  such  purposes  are  to  be  carried 
out.'  The  same  principle  would  apply  where  the  purposes  are 
clearly  contrary  to  the  public  policy  of  the  State.^  But  if  pur- 
poses are  lawful  on  their  face,  they  will,  as  against  all  but  the 
State,  be  presumed  to  be  such.^  Where  some  of  the  purposes  are 
merely  unauthorized,  while  others  are  valid  and  proper,  the 
insertaon  of  the  unauthorized  purposes  will  not  vitiate  ^  incorpo- 
ration.^ But  where  any  of  the  purposes  are  illegal  per  «e,  the  State 
officials  would  be  clearly  justified  in  refusing  to  allow  the  articles 
to  be  filed,  though  some  of  them  are  lawful.^ 

§8.  CfMrpomto  Poweis,  GlMaifioattoa  oC  —  By  ^corporate 
powers  "  is  meant  the  right  or  authority  of  a  corporation  to  act 
along  certain  lines  prescribed  for  it  in  the  instrument  whereby  it 
was  created.  The  tendency  of  modern  decisions  is  to  assimilate 
the  powers  of  private  corporations  to  those  of  individuals  and 
copartnerships.^  It  is  unnecessary  to  say  that  a  corporation  can- 
not assume  for  itself  powers  of  action,  irrespective  of  statute,  by 
the  mere  declaration  thereof  in  its  artides  of  incorporation.* 
Neither  can  they  be  created  by  by-law.^ 

The  Supreme  Court  of  the  United  States  ^  has  observed  that 

1  F.  N.  Bank  v.  Compaoj,  59  Ohio  St.  «  U.  S.  Vinegar  Co.  v.  Foaki«iMh» 
816 ;  52  N.  E.  834 ;   Inn  DnQuesne   148  N.  Y.  58;  42  N.  E.  40S. 

doUege,  S  Pa.  Dint  Ct.  Rep.  555 ;  Mat-  •  Skick  v.  CooipHij,  IS  LmL  Ap,  310; 

ter  of  Agudath  Hakehiloth,  18  N.  T.  Wa,  44  N.  E.  4S. 

Rep.  717;  42  N.  Y.  Sup.  985;  State  t*.  «  State  v.  C0119M7,  88  Wi>.5U;  60 

Company,  29  Neb.  700;  46  N.  W.  155.  N.  W.  796. 

2  Or.  Ry.  &  Nav.  Co.  v.  Or.  Ry.  Co.,  ^  Fink  v.  Company,  5  Ore.  301. 

130  U.  S.  1 ;  9  S.  Ct.  409.  «  People  v.  Green,  116  Mich.  505  ;  74 

•  SehflHtienBimdv.  AgitetkmiyereiB,  H.  W.  714. 

44  Mich.  313 ;  6  N.  W.  675 ;  McGrew  v.  9  Andrews  v.  Compaiijr,  37  Me.  SS6. 

C.  P.  Ex.,  85  Tenn.  572  ;  4  S.  W.  38 ;  /n  M  Tluwut  «.  Coiii^jr,  101  U.  S.  11. 
re  Benefit  Society,  10  Phil.  19;  People  ». 
Company,  130  IlL  268 ;  22  N.  £.  798. 

29 


§  9   INCORPORATION  AND  ORGANIZATION  OP  CORPORATIONS.    [PART  1. 

"  we  take  the  general  doctrine  to  be  that  the  powers  of  corpora- 
tions organized  under  general  statutes  are  such  and  such  only  as 
are  conferred  hy  statute.  Conceding  the  rule  applicable  to  all 
statateSy  ^at  what  is  fairly  implied  is  as  much  granted  as  what 
is  expressed,  it  remains  that  the  charter  of  the  corporation,  is 
the  measure  of  its  powers,  and  that  the  enumeration  of  these 
powers  implies  the  exclusion  of  all  others." 

The  foregoing  is  true  only  as  to  certain  classes  of  powers  which 
are  hereinafter  referred  to  as  express  powers."  The  mle  is  not 
applicable  either  to  what  are  known  as  common  law  papers  "  or 
to  the  incidental  powers  "  of  corporations.  Corporate  powers 
may  properly  be  divided  into  three  general  classes,  to  wit: 
(1)  Common  Law  Powers ;  (2)  Express  Powers ;  (3)  Incidental 
Powers.  Generally  speaking,  there  is  no  existing  rule  or  prin- 
ciple by  which  corporations  created  for  a  certain  specific  object 
or  to  carry  on  a  particular  trade  or  business  are  to  be  held  to  be 
prohibited  from  all  other  dealings  or  transactions  not  coming 
within  the  exact  scope  of  those  designated.  Undoubtedly  the  main 
business  of  a  corporation  is  to  be  confined  to  that  class  of  opera- 
tions which  properly  appertains  to  the  general  purposes  for  which 
this  charter  was  granted.  But  it  may  also  enter  into  contracts 
and  engage  in  transactions  which  are  incidental  or  auxiliary  to  the 
main  business,  or  which  may  become  necessary  or  profitable  in 
the  care  and  management  of  the  property  which  it  is  anthorized 
to  hold.  The  same  is  true  as  to  certain  powers  which  are  held 
to  exist  at  common  law  even  in  the  absence  of  any  specific  refer- 
ence to  sucli  powers  in  the  articles  of  incorporation. 

§  9.   Common  Law   Powers,  Definition  of ;   Enumeration    of.  — 

Common  law  powers  are  tliose  which  the  law  bestows  upon  cor- 
porations irrespective  of  statute  or  charter  provisions,  as  being 
necessary  for  tJie  carrying  out  of  the  purposes  for  which  it  was 
created.^  The  common  law  gives  to  corporations  the  powers 
belonging  to  corporations  of  their  class,  unless  there  is  some- 
thing in  the  nature  of  the  corporation  or  in  the  terms  of  its 
charter,  or  in  the  act  under  which  it  was  incorporated  inconsis- 
tent with  the  exercise  of  the  powers,  or  there  is  some  general 
statute  restricting  the  same.^ 

1  Falconer  y.  Campbell,  8  Fed.  Cases,  593;  Knowles?nBeatty,l  McLean,41;  Leg- 

4620  ;  2  McLean,  195 ;  C.  O.  N.  G.  &  F.  gett  v.  N.  J.  M.,  etc.  Co.,  1  N.  J.  Eq.  541. 

Co.  V.  CD.  Co.,  60  Ohio,  96;  53  N.E.  711;  <  Smith  o.  Company,  27  N.  H.  86; 

State  V.  Compwijr,  144  Mo.  ft62 ;  46  &  W.  Sutton**  Uoi^italCaM^  S  Coke*i  Hep.  259. 
30 


CHAP.  I.J 


dbafuno  thb  chabt^ 


§11 


The  common  law  powers  here  referred  to  may  be  enumerated 
as  follows:  (1)  the  right  to  the  use  of  a  corporate  name; 

(2)  the  right  to  perpetual  succession;  (3)  the  right  to  acquire, 
hold,  and  dispose  of  corporate  property ;  (4)  the  right  to  appoint 
corporate  officers  and  agents ;  (5)  the  right  to  establish  by-laws 
for  the  government  of  the  corporation,  its  officers  and  members ; 
(6)  the  right  to  sue  and  be  sued. 

An  examination  of  the  various  corporate  acts  in  force  in  the 
several  States  and  Territories  will  serve  to  show  that  without 
exception  they  contain  an  enumeration  more  or  less  full  of  the 
common  law  powers  above  referred  to.  In  Indiana  the  statute 
refers  to  them  as  common  law  powers,  and  proceeds  to  enumerate 
them.^ 

§  10.  Right  to  a  Corporate  Name.  —  The  right  to  the  USe  of  a 
corporate  name  is  a  power  well  recognized  both  at  common  law 
and  by  statute.  Corporations  have  a  property  right  to  the  use  of 
such  name  in  tiie  transaction  of  their  business  which  the  courts 
will  always  protect.*  They  are  recognized  in  law  only  by  their 
corporate  name.^ 

The  name  is  said  "  to  be  the  very  being  of  their  constitution  ; 
the  knot  of  their  combination  ;  without  which  they  could  not  do 
their  corporate  acts ;  for  it  is  unable  to  implead  and  be  impleaded, 
to  take  any  action  until  it  hath  gotten  a  name."  * 

The  action  of  State  officials  in  granting  the  use  of  a  name,  it 
may  be  observed,  is  not  conclusive,  for  courts  of  equity  will  never- 
theless protect  corporations  in  the  use  of  their  name.^  State 
officials  have,  however,  the  power  to  protect  the  use  of  corpo- 
jrate  names  when  applications  are  made  for  charters,  even  when 
the  proposed  name  is  not  exactly  similar  to  that  of  existing 
corporations.^ 

The  right  to  have  a  corporate  name  is  in  itself  a  common  law 
power ;  but  it  is  one  which  is  not  alienable.^ 

§  11.  Rig^t  of  Perpetaal  Suooession.  — The  "  right  of  perpetual 
succession"  under  a  designated  corporate  name  is  one  of  the 
common  law  powers  of  a  corporation.    The  words  "perpetual 

1  Ind.  Session  Laws,  1 901 ,  ch.  127,  §  28.  6  State  ex  rel.  v.  McGratb*  92  Mo.  SS5  ; 

«  L.  D.  Co.  V.  Massachusetts,  10  Wall.  5  S.  W.  29. 

(U.  S.)  566;  see  also  ante,  §  3.  7  State  v.  Company,  40  Kau.  96  ;  19 

•  Cnrtias  v.  Murry,  26  Gal.  633.  I»ac  349 ;  Detroit  Citizens'  Street  Rv.'  Co. 

*  Smith  ».  Companj,  SO  Ala.  65d.  v.  Common  Council,  125  Mich.  673;  85 
6  Grand  Lodge,  etc.  ».  Graham,  96  N.  W.  96. 

la.  592 ;  65  N.  W.  837. 

31 


§  13  IHCOBPOBATION  AND  OBOAHIZATIOK  OF  00BP<»ATI0N8.  [PABif  L 


succession  "  do  not  refer  to  the  duration  of  the  life  of  the  oorporar 

tion,  where  this  is  specifically  limited  either  by  statute  or  hy  the 
articles  of  incorporation,  but  merely  operates  to  grant  the  continu- 
ation of  corporate  life  daring  the  period  so  prescribed.^  Perpetual 
succession  ordinarily  merely  conveys  the  right  of  continued  un- 
broken succession  for  the  period  of  time  limited  fw  the  corporate 
existence.^ 

§  12.  Right  to  adopt  and  use  a  Corporate  Seal.  —  It  is  an  in- 
separable incident  to  every  corporation  tiiat  it  may  have  a  common 
seal,  and  make,  alter,  and  renew  the  mm»  at  pleasure  «  The  doc- 
trine of  the  common  law  requiring  the  use  of  a  corporate  seal  in 
the  execution  of  corporate  contracts  is  practically  obsolete^  and 
the  seal  is  now  required,  in  the  absence  of  express  statute,  only 
when  it  would  be  required  of  a  natural  person  under  similar 
circumstances.*  Ordinarily  the  exercise  of  this  power  is  dele- 
gated by  the  stockholders  to  the  directors  by  means  of  an 
appropriate  by-law.^ 

§  13.  Power  to  acquire,  hold,  and  dispose  of  Real  and  Personal 
Property.  — No  doctrine  of  the  common  law  is  more  clearly  and 
undeniably  estaWihed  than  that  which  concedes  to  corporations 
an  inherent  right  to  acquire  and  hold  title  to  real  and  personal 
property,  except  so  far  only  as  they  may  be  restirieted  by  the 
objects  of  their  creation  or  the  limitations  of  their  charter.*  The 
power  to  acquire  such  property,  when  not  restricted  by  statute,  is 
only  lunited  by  the  rule  that  it  must  be  such  as  is  reasonably 
necessary  or  eonvenlrat  to  enable  it  to  aeeimiplish  tiie  purposes 
for  which  it  was  created  J 

Formerly  the  amount  of  real  property  which  a  corporation 
might  purchase  and  hold  was  very  generally  limited  by  statute  in 
most  of  the  Commonwealths.  The  existence  of  such  statutes  may 
be  traced  to  the  policy  of  the  common  law  and  to  the  existence  in 
England  of  statutes  known  as  statotes  of  mcnrtmain,  which  pro- 
hibited corporations  from  taking  and  holding  real  estate  without 
licenses  from  the  king  or  Parliament^   However,  in  most  of  tiie 

1  dtm  V.  Tmi,  1»  Mo.  468;  31 S.  W.  *  Green  Co.  v.  Blodgett,  55  lU.  Ap.  556. 

•  Woodman  v.  Company,  50  Me.  549. 

a*  Scanlon  v.  Crawshaw,  5  Mo.  Ap.  •  LuAiop  v.  Bank,  8  Djna  (Ky.).  114; 

887 :  see,  however,  FaiichiW  ».  AMOoatkm,  Thompioii  9.  WateM,  26  Mich. 

^J'i^  ^26.  T  Blown  V.  Hogg,  14  111.  219  ;  BMOmid- 

»  Bauson  r.  Bank,  18  N.  J.  Eq.  il2 ;  son  v.  Association.  131  Mass.  174. 

TlHHBat  V.  DaklB, »  W«id.  9.  8  Lewnw  ».  Hillegas,  7  Ser.  &  B.  (Pa.) 

a2 


CHAP.  I.] 


DBAFTENO  THE  CHABTEB. 


§15 


6tates  such  restrictions  have  been  done  away  with,  and  corpora- 
tions may  now  hold  such  property,  both  real  and  personal,  as  the 
attainment  of  their  corporate  purposes  may  require.  In  anj 
event,  the  general  power  of  a  corporation  to  hold  real  estate  is 
primarily  a  question  betwen  the  corporation  and  the  State,  and 
cannot  ordinarily  be  raised  by  third  parties.^  Where  such  statutes 
exist  the  corporation  has  of  course  no  power  to  exceed  the  statu- 
tory limit  as  against  the  State.^ 

The  general  rule  is  that  corporations,  unless  forbidden  by  stat-  • 
ute,  have  implied  power  to  take  property  by  devise.'  The  same 
rule  applies  with  respect  to  the  power  of  taking  and  holding 
property  in  trust,  provided  in  so  doing  it  acts  within  its  corporate 
powers.*  The  power  of  a  corporation  to  sell  and  convey  is  as 
broad  as  the  power  to  purchase  and  hold,  and  is  granted  on  the 
same  terms.* 

§  14.  Power  to  uppoint  Oorporate  Offloen  and  Agents. — At 

common  law  corporations  have  the  inherent  power,  irrespective 
of  statute  or  charter  provision,  to  elect  directors  and  executive 
officers  and  to  appoint  such  agents  as  the  business  of  the  corpora- 
tion require.* 

§  15.  Poww  to  evialiMali  Bjr-iAwe. — Every  corporation  has  the 
implied  power  to  enact  such  by-laws  as  may  be  necessary  for  the 
proper  government  of  the  corporation,  its  officers,  and  stock- 
holders.7 

Sometimes  the  statutes  prescribe  the  nature  of  the  by-laws  to  be 
adopted  and  authorize  p^altses  for  violation  therool' 

818;  White  ».  Howard,  38  Conn.  342;       *  Vidal  r.  Girards  Executors,  2  How. 

Pag©  V.  Heioeberg,  40  Vt.  81 ;  Riyaanv  (U.  S.)  127 ;  Morrig  v.  Maj,  16  Ohio,  469 ; 

Nav.  Co.  V.  Dawsons,  3  Grat.  (Va.)  19 ;  F.  L.  T.  C!o.  v.  H.  F.  N.  Co..  41  N.  Y. 

Moore  v.  Moore,  4  Dana  (Ky.),  354;  Mai-  619;  White  v.  Rice,  IIS  Mich.  40S;  70 

lett  V.  Simpson,  94  N.  C.  37 ;  Trustees  v.  N.  W.  1024;  GieeiM  v,  DaaoB,  6  Conn. 

Manning,  72  Md.  116 ;  19  Atl.  599;  First  304. 

M.E.  Church  «.  Dixon,  178  IlL  260;  52       &  Miners'  Ditch  Co.  v.  Zellerbach,  37 

N.  B.  887,  Cal.  543 ;  People  v.  College,  38  Cal.  166. 

1  C.  B.  &  Q.  R.  B.  Co.  V.  Lewis,  fiS      •  Kearney  v.  Andrews,  10  N.  J.  Eq.  70; 
la.  101 ;  4  N.  W.  842.  A.  R.  R.  Co.  v.  Kidd,  29  Ala.  22 1. 

2  Market  St.  Ry.  Co.  v.  Hellman,  109  f  Wells  v.  Black,  117  Cal.  157 ;  48  Fte. 
Cal.  571;  42  Pac.  225;  In  re  McGraw's  1090;  People  v.  Society,  24  Barb.  N.  Y. 
Estate,  111  N.  Y.  66;  Andrews  v.  An-  570;  Martin  v.  Association,  2  Coldw. 
drews,  110  HI.  223;  Graves  v.  Niles,  1  (Tenn.)  418;  Mechanics' Bank  t.  Smith,  19 
Walker  (Mich.),  332.  Johns.  (N.  Y.)  115;  Steger  v.  Davis,  8 

•  White  r.  Howard,  88  Conn.  342;  Tex.  Ciy.  App.  23;  27  a  W.  1068. 
Ravanna  NaT.  Co.  ».  Bawioos^  3  Grat       •  Cahill  v.  Company,  2  Dong.  (Mich.1 

(^^)  1S8 ;  Mobile  v.  YaOle,  8  Ala.  137. 


§  IT  INCOEPOBATION  AND  ORGANIZATION  OP  CORPORATIONS.  [PART  I. 

§  16.  Power  to  sue  and  be  ened.  —  It  has  been  the  rule  of  tlie 
courts  from  time  immemorial  to  recognize  and  enforce  the 
power  of  corporations  to  soe  and  be  sued  under  and  by  their  cor- 
porate name  as  incident  to  such  corporate  exist^ce.* 

§  17.  Express   Powers,  Definition  of;   Bnumeratlon  of.  —  Ex« 

press  powers  are  those  which  are  either  granted  to  all  corpora- 
tions alike  by  statute,  whether  inserted  in  the  charter  or  not, 
or  else  are  those  which  are  permitted  by  statute  to  such  corpora- 
tions as  may  see  fit  to  take  advantage  of  them,  by  reserving  such 
powers  in  the  charter  itself.    Statutes  of  the  character  first  re- 
ferred to  are  construed  by  the  courts  to  be  ipso  facto  read  into 
the  charter,  thereby  becoming  part  and  parcel  of  it.    On  the  other 
hand,  tiie  last-named  powers  can  only  be  availed  of  by  the  corpo- 
ration when,  as  lias  been  stated,  tiiey  are  specifically  reserved  or  set 
forth  in  the  articles  of  incorporation.   Express  powers  relate  not 
only  to  the  right  to  engage  in  a  special  line  of  business  as  set 
forth  in  the  statement  in  the  articles  of  the  object  or  purposes  for 
which  the  corporation  is  formed,  but  they  relate  as  well  to  other 
powers  which  are  here  termed    express/'  inasmuch  as  they 
depend  upon  the  existence  of  specific  statutes  authorizing  tlieir 
exercise  by  such  corporations  as  desire  to  avail  themselves 
thereof.    These  express  powers  may  be  divided  into  twenty-eight 
classes,  enumerated  as  follows :  (1)  power  to  purchase  its  own 
eaiatal  stock ;  (2)  power  to  subscribe  for,  purchase,  and  hold  stock 
in  other  corporations ;  (3)  power  to  consolidate  with  other  cor- 
porations ;  (4)  power  to  transact  all  or  any  part  of  its  business 
outside  of  the  State  of  its  origin ;  (5)  power  to  extend  its  cor- 
porate existence;  (6)  power  to  change  its  corporate  name  ;  (7) 
power  to  increase  or  decrease  its  capital  stock ;  (8)  power  to 
issue  preferred  stock;  (9)  power  to  change  the  corporate  pur- 
poses ;  (10)  power  to  change  the  number  of  directors ;  (11)  power 
to  change  its  domiciliary  office  or  place  for  the  transaction  of  its 
business;  (12)  power  to  acquire  and  enforce  a  lien  upon  stock  of 
the  cwporation  to  secure  the  payment  of  debts  due  the  corporation 
from  stockhdders ;  (18)  power  to  levy  assessments  against  the 
stockholders  with  the  right  to  forfeit  the  stock  for  non-payment 
thereof ;  (14)  power  to  authorize  voting  at  stockholders'  meetings 
by  proxy ;  (15)  power  to  allow  cumulative  voting  at  the  election 
of  directors ;  (16)  power  to  issue  stock  as  full  paid  and  non- 

1  &  W.  Co. ».  AfBMtraDg^  17  Me.  34. 

84 


CHAP.  I.] 


DBAPTING  THE  CHABTE&. 


§17 


assessable  in  exchange  for  property  or  services ;  (17)  power  to 
sell  the  corporate  assets;  (18)  power  to  voluntarily  dissolve  the 
corporation  without  recourse  to  «ie  courts  ;  (19)  power  to  insert 
In  the  charter  provisions  for  the  regulation  of  the  internal  affairs 
of  the  corporation  ;  (20)  power  to  authorize  directors  to  adopt  by- 
laws;  (21)  power  to  authorize  appointment-  of  executive  com- 
mittee from  board  of  directors ;  (22)  power  to  enlarge  or  diminish 
corporate  powers ;  (28)  power  to  change  par  value  of  shares ; 
(24)  power  of  bondholders  to  vote  at  elections  of  directors ;  (25) 
power  to  classify  directors ;  (26)  power  to  amend  articles  before 
organization ;  (27)  power  to  surrender  charter  before  organiza- 
tion; (28)  power  given  to  minority  stockholders  to  compel 
purehase  of  their  holdings  upon  consolidation. 

Of  the  foregoing  enumerated  powers,  the  following  when  ex- 
pressly authorized  by  statute  are  applicable  to  all  corporations 
alike,  whether  reserved  or  enumerated  in  the  articles  of  incorpora^ 
tion,  to  wit:  The  power  to  consolidate  with  other  corporatbos;  to 
perform  constituent  acts  outside  of  the  State  of  its  origin ;  to 
extend  its  corporate  existence ;  to  change  its  corporate  name ;  to  in- 
crease or  decrease  its  capital  stock ;  to  change  the  corporate  pur- 
poses,  the  number  of  its  directors,  its  domiciliary  office  or  place 
for  the  transaction  of  its  business ;  to  acquire  and  enforce  a 
lien  upon  stock  of  the  corporation  to  secure  the  payment  of  debts 
due  the  corporation  from  stockholders ;  to  levy  assessments  against 
the  stockholders  with  the  right  to  forfeit  stock  for  non-payment 
thereof;  to  authorize  voting  at  stockholders'  meetings  by  proxy; 
to  permit  cumulative  voting  at  election  of  directors  (unless  such 
right  is  merely  made  permissible  by  statute) ;  to  issue  stock  as  full 
paid  and  noti-assessable  in  exchange  for  property  or  services  ;  to 
sell  the  corporate  fissets  in  their  entirety  ;  to  voluntarily  dissolve 
the  corporation  without  recourse  to  the  courts ;  to  authorize  the 
directors  to  adopt  by-laws  (unless  such  authority  is  by  statute  re- 
quired to  be  reserved  in  the  articles  of  incorporetion) ;  to  appoint 
an  executive  committee;  to  enlarge  or  diminish  the  corporate 
powere ;  to  change  the  par  value  of  shares ;  to  amend  articles 
before  organization ;  to  surrender  charter  before  organization ; 
power  given  to  minority  stockholders  to  compel  purchase  of  their 
holdings  upon  consolidation. 

Of  the  remaining  express  powere  it  is  probably  in  accord  with  the 
general  omrreat  of  authority  in  this  country  to  say  that  to  be 

85 


§  18  INCOBPOBiiTION  AND  OBOANIZAHON  OF  COBPOBATIONS.  [PABI  I. 

aTailable  to  the  corporation  they  must  be  reserved  or  specified  in 
the  articles  of  incorporation.  The  powers  to  which  reference  is 
here  made  may  be  enomerated  as  follows:  To  subscribe  for, 
purchase,  and  hold  stock  in  other  corporations ;  to  transact  all 
or  any  part  of  its  business  outside  of  the  State  of  its  origin ;  to 
issue  preferred  stock ;  the  power  to  insert  in  the  charter  provisions 
for  the  Isolation  of  the  internal  affairs  of  the  corporation; 
power  of  bondholders  to  rote  at  dection  of  directors;  power  to 
classify  directors ;  and  possibly  power  to  purchase  its  own  capital 
stock. 

§  18.  Power  of  Corporations  to  purchase  tiieir  own  Stock.  — 

There' is  considerable  conflict  of  opinion  in  this  country  relative 
to  the  question  whether  a  corporation  may  purchase  its  own  stock 
without  express  statutory  authority  so  to  do.  One  Kne  of  deci- 
sions holds  to  the  view  that  such  power  exists  only  when  expressly 
conferred  by  statute  no  matter  what  the  purpose  may  be.^  Other  • 
courts  of  equally  high  standing  take  the  view  —  and  this  we  beUeve 
to  be  tiie  true  .one — that  erery  corporation  has  implied  power  to 
purchase  its  own  stock  proTided  it  does  so  in  good  faith  and  with- 
out prejudice  to  the  rights  of  creditors.*  It  has  been  said  that, 
"  generally  speaking,  a  corporation,  when  acting  within  the  scope 
of  the  purposes  of  its  organization,  has  the  same  power  to  con- 
tract with  reference  to  such  powers  as  an  individual.  We  believe 
the  rule  to  be  well  settied  m  the  United  States  by  the  overwhelm- 
ing weight  of  authority  and  reason  that  a  private  corporation  may 
purchase  its  own  stock  if  the  transaction  is  fair  and  in  good  faith  ; 
if  it  is  free  from  fraud,  actual  or  constructive  ;  if  the  corporation 
Is  not  insolvent  and  in  process  of  dissolution,  and  if  the  rights  of 
ereditors  are  in  no  way  affected  thereby."  ' 

Where  there  is  no  formal  corporate  action  taken,  autiiOTizing 
the  purchase  of  the  company's  own  stock,  a  purchase  made  thereof, 
even  though  all  the  stockholders  separately  consented  thereto, 
would  be  invalid  as  against  creditors*^ 

1  CmicUa  9.  liBOoln,  61  Conii.  78;  Yt  131 ;  Chapman  v.  Company,  62  N.  J. 
CBRierv.Coiiil»&7,56N.H.262;  Mofgtm  497;  41  Atl.  690;  Belknap  v.  Adams,  49 
r.  Lewis,  46  O.  St.  1 ;  17  N.  E.  558.  La.  Ann.  1350;  22  Sou.  382  ;  Ins.  Co.  y. 

2  City  Bank  Columbus  v.  Bruce,  17  Swigert,  135  HI.  162;  25  N.  E.  382;  Pot- 
N.  Y.  507 ;  N.  E.  T.  Co.  v.  Abbott,  162  ter  v.  Company  (Mont.),  74  Pac.  988. 
Mass.  148 ;  38  N.  E.  432 ;  Clapp  v.  Peter-      •  Pwcter  ».  Company  (Mont.),  74  P*c 
Ben,  104  Dl.  26 ;  Hall  &  Farley  v,  Heiid«r-  988. 

ioii,l26Ala.449;  BMkit  Omfntj,lB      *  DtlaVofgMBrfrlgwrtorMidiiiie 

d6 


GHAP.  I.]  ^        DBAPrmO  THE  CHABTEB,  §  19 

Some  of  the  States  expressly  authorize  corporations  to  purchase 
shares  of  their  own  capital  stock,  while  others  expressly  forbid  it^ 

The  rule  of  course  does  not  apply  to  those  cases  where  statutes 
exist  expressly  authorizing  the  forfeiture  of  stock  for  non-pay- 
ment of  assessments.^  The  purchase  by  a  corporation  of  its  own 
stock  does  not  extinguish  it^  Many  of  the  States  haye  statutes 
expressly  forbidding  corporations  to  vote  their  own  stock  when 
held  or  owned  by  them.  Even  in  the  absence  of  such  statute,  it  is 
probable  that  the  courts  would  enjoin  corporations  from  voting 
their  own  stock.*  By  statute  in  a  number  of  States  corporations 
are  forbidden  to  purchase  their  own  stock.^ 

§  19.  Power  to  snlMiortbe  for,  pmrohaM,  mad  hold  Stook  in  otiimr 
Corporations.  —  The  prevailing  rule  in  this  country  is  that  unless 
the  power  is  expressly  given  by  statute  or  by  reservation  of  such 
right  in  the  charter,  corporations  have  no  implied  power  to  sub- 
scribe for,  purchase,  or  hold  stock  in  other  corporations.^ 

An  attempt  has  been  made  in  some  States  to  establish  the  rule 
that  where  the  statute  does  not  expressly  prohibit  such  act,  the 
corporation  may  purchase  stock  in  other  corporations  without  any 
express  authority  so  to  do,  provided  the  circumstances  are  such 
as  to  render  the  transaction  a  necessary  and  proper  means  for 
accomplishing  the  objects  of  its  creation.' 

If,  however,  there  is  no  statutory  prohibition  in  the  matter  and 
the  State  officials  permit  the  insertion  in  the  articles  of  the  power 
to  purchase  and  hold  stock  in  other  corporations,  the  exercise  of 
such  power  is  unquestionably  valid.^  In  the  same  connection  it 
may  be  observed  that  a  corporation  cannot  oi^nize  subsidiary  com- 
panies unless  such  power  is  given  in  express  terms  in  the  diarter 
or  by  necessary  implication  from  the  powers  thereby  conferred.* 

Co.  V.  German  Savings  Institution,  175  40  Ga.  582;  First  Nat.  Bank  r.  Nat.  Ex- 

U.  S.  38;  44  L.  E.  65.  change  Bank.  9S  U.  S.  122;  Knowlee  v. 

1  See  Fart  III.  Table  15,  page  585 ;  also  Sandercock,  107  Gal.  629  ;  40  Fte.  1047. 
Tolman  v.  Company  (Dak.),  22  N.  W.  505.       '  Hill  v.  Nigbet,  100  Ind.  341  ;  Peshtigo 

2  Taylor  v.  Company,  6  Ohio,  83;  Co.  v.  Company,  50  111.  App.  624;  S.  P. 
State  V.  Association,  35  O.  St.  258.  T.  Co.  v.  Company,  50  Minn.  93  ;  52  N.  W. 

*  Bank  v.  Wickersham,  34  Cal.  444 ;  274 ;  Steamship  Co.  i;.  Company,  28  lAi 
Clapp  V.  Peterson,  104  IlL  26.  An.  178. 

*  See  McNeely  v.  Woodruff,  18  N.  J.  »  N.  8.  Co.  v.  Horton  (Neb.),  93  N.  W. 
Law,  352;  Brewster  17.  Hartley,  37  Cal.  15.  225;  De  La  Vergne  Befrigerating  Ma- 

^  See  Tolman  v.  Compaiqr  (Dak.),  22  chine  Co.  v.  German  Savings  IwitotMMi. 
N.  W.  505.  175  U.  S.  38 ;  20  S.  Ct.  20. 

6  Franklin  Bank  v.  Commercial  Bank,  *  Lagrone  v.  Timcierman,  46  S.  C.  872 } 
36  0.  St.  258;  Central  Ry.  Co.  v.  Collins,   24  S.  £.  290. 

37 


§  2i  mooBPcnuTioN  and  oboanization  of  oqbpobations.  [PABT  I. 


In  Akdia,  Bislarlot  of  Oolmnbia,  and  Georgia  corporations  are 

forbidden  by  statute  to  hold  stock  in  other  corporations. 

§  20.  Power  to  consolidate  with  other  Corporations.  —  Corpora- 
tions cannot  consolidate  as  against  dissenting  stockholders, 
hofreyer  desirable  or  beneficial  the  eonsotidation  may  be,  unless 
l^itlaliTe  antiiority  is  granted  to  that  end.^  In  the  exercise  of  the 
police  power  of  the  State  it  maj  lawfnllj  prohibit  the  consolidation 
of  corporations.^ 

Consolidation  of  corporations  to  a  greater  or  less  extent  is. 
permitted  by  statute  at  the  present  time  in  the  States  of  Alabama^ 
Califomia,  OonneetiGat,  Delaware,  Dlinois,  Kentucky,  Maine, 
Montana,  Nevada,  New  Jersey,  New  York,  North  Carolina,  Vir- 
ginia, and  West  Virginia.  An  attempt  has  been  made  to  lay  down 
the  rule  that  in  order  to  effect  a  lawful  consolidation  as  between 
two  corporations,  the  power  to  so  consolidate  must  be  conferred 
by  eaeh  of  the  States  under  whose  laws  fkey  were  created.^  A 
better  role,  howeyer,  and  the  only  practicalde  one  seems  to  be 
this :  That  either  statutory  power  to  dispose  of  all  the  assets  of 
the  corporation,  or  in  the  absence  thereof,  the  consent  of  all  the 
stockholders  must  be  obtained  to  the  sale  of  the  assets  of  one 
corporation  to  another.  Consolidation  in  this  way  then  takes  the 
form  (d  a  selling  ool  and  of  aooepting  money  or  riiares  in  the  new 
corporation  in  return  for  the  assets  of  the  old.^ 

§  21.  Power  to  transact  all  or  any  Part  of  the  Corporate  Business 

outside  of  the  State  of  its  Domicile.  —  If  there  are  no  statutory  re- 
strictions, a  corporation  has  implied  power  to  carry  on  its  business 
at  any  place  within  the  State  in  which  its  charter  is  procnred.* 
The  statutory  requirement  reqairing  the  corporation  to  fix  in  the 

articles  its  principal  place  of  business  does  not  prohibit  under 
ordinary  circumstances  the  transaction  of  other  business  within 
the  State.^ 

Long  ago  in  Bank  of  Angusta  v.  Earie  ^  Chief  Justice  Taney, 

1  Pearce  v.  Ry.  Ca,  91  How.  341 ;  Hill  Badiie,  etc  By.  Co.  v.  Companj,  49  HL 

V,  Nisbet,  lOS  lad.  841 ;  PeoiOe  r.  Com-  881. 

pony,  121  N.T.582  ;  24N.E.  834;  L.4N.       ^  Ashley  Wire  Co.  v.  Company,  60 

By.  Co.  ».  Kentucky,  161  U.  S.  677.  111.  App.  179;  City  Bank  v.  Beech,  1 

3  L.  &N.  By.  Co.  V.  Kentucky,  161  U.  S.  Blatchford,  425  ;  Stickle  v.  Company  (N. 

677.  J.  Eq.),  32  Atl.  708 ;  Underwood  v.  Wal- 

9  Id.  dion,  12  Mich.  73 ;  Berthin  v.  Company, 

*  Matter  of  ProfpectPaik,  etc.  By.  Co.,  S8  La.  An.  910;  Lane  v.  Bank,  9  Hdik. 

87  H.  T.871 ;  Toledo,  etc  By.  Ca  v.  Com-  (Teiin.)  419. 

pany,  95  Fed.  497  ;  36  C.  C.  A.  155;       «  Potter    Bank,  6  Hill  (N.  Y.),  49a 
LaiinaB  «.  Coiqmr,  80  Pa.       42>      ?  uX^eters,  519. 
88 


CHAP.  L] 


DBAFTINO  THE  CHARTER. 


§21 


commenting  npon  the  right  of  a  corporation  to  transact  Uusiness 
be/ond  the  limits  of  Hie  domiciliary  State,  spoke  as  follows : 

"It  is  very  true  that  a  corporation  can  have  no  legal  existence 
out  of  the  boundaries  of  the  sovereignty  by  which  it  is  created. 
It  exists  only  in  contemplation  of  law,  and  by  force  of  the  law ; 
and  where  that  law  ceases  to  operate,  and  is  no  longer  obligatory, 
the  corporation  can  have  no  existence.  It  must  dwell  in  the  place 
of  its  creation  and  cannot  migrate  to  another  sovereignty.  But 
although  it  must  live  and  have  its  being  in  that  state  only,  yet  it 
does  not  by  any  means  follow  that  its  existenoe  there  will  not  be 
recognized  in  other  places ;  and  its  xesidenoe  in  one  state  creates  no 
insuperable  objection  to  its  power  of  contracting  in  another.  It  is 
indeed  a  mere  artificial  being,  invisible  and  intangible ;  yet  it  is  a 
person  for  certain  purposes  in  contemplation  of  law.  .  .  .  Natural 
persons  through  the  intervention  of  agents  are  continually  making 
contracts  in  countries  in  which  they  do  not  reside  ;  and  where  they 
are  not  personally  present  when  the  contract  is  made ;  and  nobody 
has  ever  doubted  the  validity  of  these  agreements.  And  what 
greater  objection  can  there  be  to  the  capacity  of  an  artificial  person, 
by  its  agents,  to  make  a  contract  within  the  scope  of  its  limited 
powers,  in  a  sovereignty  in  which  it  does  not  reside ;  provided  such 
contracts  are  permitted  to  be  made  by  them  by  the  laws  of  the 
place."  * 

The  strictly  legal  existence  of  a  corporation  is  confined  to  the 
State  which  created  it,  and  it  can  exercise  its  powers,  in  another 
State  only  by  permission,  express  or  implied,  of  the  legislative 
power  thereof ;  but  the  mere  right  to  purchase  and  sell  property 
will  be  recognized  and  protected  in  any  State  subject  only  to  the 
limitations  that  the  exercise  of  such  right  shall  not  be  contrary  to 
the  laws  or  settled  policy  of  the  latter  State  or  prejudicial  to  its 
interests  or  those  of  its  ciMzens.  Unless  the  Constitution  or  stat- 
utes declare  a  contrary  rule,  the  courts  of  another  State  are  bound 
to  recognize  the  right  of  a  foreign  corporation  to  collect  debts  due 
to  it,  by  receiving  a  conveyance  of  land.^ 

In  order,  however,  to  avoid  complications  that  might  possibly 
arise  through  hostile  action  on  the  part  of  stockholders  or  of  foreign 
States,  statntes  have  been  enacted  in  a  number  of  the  Gommon- 

^  See  Hall  v.  Company,  91  Ala.  363 ;  8      <  Thompson  i;.  Waters,  25  Mich.  214. 
8a  848. 

89 


§  23  INCORPORATION  AND  ORGANIZATION  OF  CORPORATIONS.  [PART  L 


wealths  expressly  authorizing  the  tramuiction  of  business  in  foreign 
states  and  jnrisdictions.^ 

Under  the  progressiye  incorporation  acts  in  force  in  many  of 
the  States  at  the  present  time  it  is  unquestionably  permissible  to 
organize  corporations  in  one  State  for  the  exclusive  purpose  of 
transacting  their  entire  business  in  other  States  and  Territories.^ 

§  22.  Fowor  to  pifciCTt  OMMtttuiit  Aets  outside  of  tt»  Domi- 
ciliary stata — By  constituent  acts  is  meant  snch  corporate  trans- 
actions  as  are  separate  and  apart  from  its  ordinary  business 
dealings  with  third  parties  ;  such,  for  example,  as  the  organization 
of  the  corporation  in  the  first  instance,  the  adoption  of  by-laws, 
the  issuance  of  stock  certificates,  the  election  of  directors  and 
officers,  and  the  holding  d  Btockhcdders'  meetings.'  As  a  general 
rule  such  constittnent  acts  cannot  be  performed  withoat  the  domir 
ciliary  State.* 

The  legislature  may,  of  course,  authorize  the  performance  of 
constituent  acts  beyond  the  limits  of  the  State.  This  has  been 
done  in  a  nnmber  of  the  Commonwealths.^  It  is  probably  safe  to 
say  that  aside  from  organization  meetings  the  presence  of  stock- 
holders of  the  corporation  at  a  meeting  held  without  the  State  will 
estop  them  from  attacking  the  validity  of  the  proceedings  had  at 
such  meeting.^ 

§  28.  Power  to  wKtend  Coipon^  BxiMiio*. — In  twenty-seren 

1  See  Part  III.  Table  12,  page  582.  See  428 ;  Galveston,  etc.  Bj.  Co.  v.  Cowdwy, 
AsUey  Wiie  Co.  v.  Company,  60  m.  App.  11  WalL  459  ;  80  Law.  Ed.  199. 

179;  Kennebec  Co.  v.  Company,  72  Mass.       ^  Commonwealth  v.  Smith,  45  Pa.  St. 

204 ;  Aspinwall  v.  Company,  20  Ind.  492 ;  59 ;  Smith  v.  Company,  64  Md.  85  ;  20  Atl. 

Blodgett  V.  L.  Z.  Company,  120  Fed.  893.  1032;  Tuckasegee  Mining  Co.  v.  Goodhue, 

2  Sec.  Nat.  Bank  v.  Hall,  35  O.  St.  158  ;  118  N.  C.  981 ;  24  S.  E.  797  ;  Camp  ». 
M.  L.  &  S.  Co.  V.  Reinhard,  114  Mo.  218 ;  Byrne,  41  Mo.  525 ;  F.  T.  L.  Co.  v.  Laigle, 
21  S.  W.  488;  O.  M.  Co.  v.  Gamt,  18  59  Tex.  839;  Ciaig  Co.  v.  Smith,  168 
R.  1  484  ;  28  AtL  973 ;  People  v.  Com-  Mass.  262 ;  39  N.  E.  1116 ;  Bellows  v,  Todd, 
pany,  153  111.  25;  38  N.  E.  752;  Tilley  v.  39  Iowa,  209;  Hodgson  v.  Company,  46 
Coykendall,  172  N.  Y.  87  ;  65  N.  E.  574 ;  Minn.  454 ;  49  N.  W.  197  ;  Harding  v.  Com- 
Minn.,  etc.  Co.  v.  Denslow,  46  Minn.  171  ;  pany,  182  111.  551 ;  55  N.  E.  577 ;  Jones  v. 
48  N.  W.  771 ;  Wright  v.  Lee,  2  S.  D.  Company,  20  Col.  417  ;  38  Pac.  700;  Mack 
596;  51  N.  W.  706;  A.,  etc  R.  R.  Co.  v.  v.  Company,  90  Ala.  396  ;  8  So.  150; 
Fletcher,  35  Kaa.  286;  10  Pac  596:  North,  Aspinwall  «.Compaoj,  20  Ind.  492 ;  CoQXt- 
etc.  Stock  Co.  V.  People,  147  IlL  234 ;  right  v.  Deeds,  37  Iowa,  503. 

35  N.  E.  608;  Canada  S.  Ry.  Co.  v.  Geb-       »  See  Part  III.  Table  11,  page  581. 
hard,  109  U.  S.  527  ;  3  S.  Ct.  363  ;  Cowell       «  Handley  v.  Stutz,  139  U.  S.  417  ; 

V.  Springs  Co.,  100  U.  S.  55;  Ha.stings  r.  Galveston,  etc.  Ry.  Co.  v.  Cowdrey,  11 

Anacortes,  etc.  Co.,  29  Wash.  224 ;  69  Wall.  459 ;  see  also  Humphreys  v.  Mooney, 

Pfec776;  IrniieCo.v.Boiid,74Fed.849.  5  Col.  288. 
s  See  McCdl     Compaiiy,  6  Cobb. 

40 


CHAP.  I.] 


DRAFTING  THE  CHABTEB, 


of  the  Commonwealths  perpetual  existence  is  permitted  in  the 
incorporatioa  of  companies  therein.  The  power  to  extend  such 
existence  is  not  of  any  material  importance  in  these  Common- 
wealths. Twenty-fiye  of  the  incorporation  acts  specifically  provide 
for  the  extension  of  corporate  existence.  Without  such  statutorj 
authority  corporate  existence  cannot  be  extended.^ 

In  some  of  the  States  extension  of  corporate  existence  must  be 
accompanied  by  the  payment  of  an  organization  tax,  as  is  the  ease 
of  new  corporations.  Tims,  in  New  Jersey,  where  such  a  provi- 
sion exists,  it  has  been  held  that  such  tax  must  be  paid  even 
though  the  extension  of  the  corporate  existence  was  obtained  in 
the  guise  of  an  amendment  to  the  charter.^ 

§  24.  Power  to  oliaiiee  tb«  Cknporate  name.  —  Without  statu- 
tory authoriiy  so  to  do  corporations  cannot  change  their  name.* 
If  the  proposed  change  of  name  conflicts  with  the  name  of  an 
existing  domestic  corporation,  State  officials  are  justified  in  refus- 
ing to  allow  the  certificate  shQwing  the  adoption  of  the  new  name 
to  be  filed.* 

Some  of  the  Sti^tes,  as,  for  example,  New  York  and  Califomia, 

only  permit  change  of  name  by  application  to  the  courts. 

§  25.  Power  to  increase  or  decrease  Capital  Stock.  —  A  corpo- 
ration has  no  implied  power  to  either  increase  or  decrease  the 
capital  stock.^  Such  power  must  be  conferred  in  express  terms 
by  the  incorporation  act  under  which  the  corporaticm  is  organized.* 

Power  to  increase  or  decreiise  capital  stock  vests  in  the  stock- 
holders and  not  in  the  directors.'^  Frequently  incorporation  acts 
provide  that  the  stock  shall  not  be  diminished  to  less  than  the 
amount  of  the  corporate  debts.  Such  is  the  case  in  California 
and  oi^er  States.  Certificates  of  stock  issued  on  a  fictitious 
increase  of  stock  are  void.^ 

§  26.  Power  to  issue  Preferred  Stock.  —  Stockholders  enjoying 

1  See  Part  IlL  Table  8,  page  578;  also  ^  Sutherland  v.  Olcott,  95  N.  Y.  93; 
post,  sec.  120.  Crandall  v.  Lincoln,  52  Conn.  73  ;  G.  L.  & 

2  NationalLead  Co.  v.  Dickinson  (N.  J.),  H.  Insurance  Co.  v.  Kamper,  73  Ala.  325 ; 
57  AtL  188.  Palmer  v.  Bank,  72  Minn.  266;  75  N.  W. 

*  Sykes  v.  People,  132  HI.  S3 ;  2p  N.  E.  880;  Detroit  Chamber  of  Commerce  ». 
391 ;  C.  D.  &  M.  Ky.  Co.  v.  Keisel,  43  la.  State  Seerefeaiy,  1C9  Midi.  891 ;  67  N.  W. 
89;  Glass  Co.  v.  Company,  32  Ind  376.  897. 

*  /nrcU.  S.M.  Rep.  Agency,  115  N.Y.  t  C.  C.  By.  Co.  v.  AUerton, .  18  WalL 
176  ;  21  N.  E.  1034  ;  People  v.  Company,  233. 

Ill  Mich.  405;  69  N.  W.  653.  «  Beitman  v.  Steiner,  .98  Ala.  241; 

*  Ins.  Co.  V.  Kamper,  73  Ala.  825 ;  Poll-  18  Son.  87. 
Qan  o.  Upton,  96  U.  8. 8S8. 

41 


§26  INCORPOEATION  AND  ORGANIZATION  OF  COBPORATION&  [PABf  L 

preferential  or  additional  rights  not  enjoyed  by  the  holders  of 
common  shares  are  called  "  preferred  stockholders."  The  issu- 
ance of  preferred  stock  is  a  mode  by  which  a  corporation  obtains 
funds  for  its  enterprise,  without  borrowing  money  or  contracting 
a  debt^  The  question  as  to  whether  or  not  preferred  stock  may 
be  issued  by  corporations  without  express  authority  by  law  is  a 
somewhat  difficult  one  to  settle.  In  twenty-five  of  the  States  ^  the 
question  is  settled  by  the  existence  of  statutes  expressly  authoriz- 
ing the  issoance  of  preferred  stock,  and  even  in  those  States 
where  no  such  statutes  exist  it  is,  with  some  few  exceptions,  the 
custom  of  the  State  officials  ta  permit  the  insertion  in  the  articles 
of  incorporation  of  provisions  authorizing  the  issuance  of  preferred 
stock.  Tlie  action  of  such  officials  is  certainly  conclusive  as 
against  all  the  world  except  the  Statc.^ 

Tlie  tme  rule  governing  ^e  matter  now  before  us  is,  in  the 
opinion  of  the  writer,  best  set  forth  in  tlie  case  of  Campbell  v. 
American  Zylonite  Company.*  In  this  case  the  articles  of  incor- 
poration divided  the  capital  stock  of  the  corporation  into  shares, 
equal  in  amount  and  value.  Some  time  after  incorporation  one  of 
the  stockholders  executed  a  blank  assignment  of  certain  stock 
owned  by  him  to  a  tiiird  party  as  security  for  a  loan.  Subsequently 
all  the  stockholders,  except  tlie  owner  of  this  pledged  eertificate, 
at  a  meeting  duly  called  for  that  purpose,  voted  to  surrender  to 
tlie  corporation,  without  consideration,  forty  per  cent  of  their 
i^ock,  and  authorized  the  corporation  to  reissue  this  forty  per  cent 
in  the  form  of  preferred  shares.  The  l^^ity  of  this  act  wa9 
contested  by  the  holder  of  the  pledged  certificate,  and  in  passing 
upon  the  legal  question  involved,  the  court  spoke  as  follows : 

**  The  right  of  every  shareholder  to  his  proportion  of  the  profits  of 
the  corporation  was  vested,  and  in  the  absence  of  some  power  to 
change  the  relative  value  of  the  shares  conferred  by  statute  or  by 
the  articles  of  incorporation,  no  change  could  be  made  without  the 
consent  of  all  the  shareholders.  .  .  .  The  assignee  of  shares  having 
possession  of  the  eeiiifieafees,  althoi^h  holding  under  unregistered 
transfers,  axe  not  bound  by  oontraets  between  tiie  registered  share- 
holders, the  corporation  and  all  the  o^r  shaieholden  which  are  not 
within  the  express  or  implied  powers  of  corporations  or  of  their  share- 
holders.   As  between  the  assignor  and  the  assignee,  the  unregistered 

1  CbaibB  9.  CowpaiiJ,  S5  Yt  llC  '  See  Hamlin  v.  K.  K.  Co.,  78  Ftd.  670. 

t88eFtetIII.1Mil»8»9if»S78.  «  US  N.  Y.  455  ;  25  N.  £.  8d3. 

43 


GHAP.  I.] 


DBAmNG  1^1  CIBABTBR. 


§26 


assignment  was  not  void.  It  follows  that  the  change  in  the  relative 
value  of  the  shares  which  this  corporation  and  its  registered  share- 
holders sought  to  effect  was  not  within  the  express  or  implied  powers 

conferred  upon  the  corporation  or  shareholders,  and  that  their  action 
is  not  binding  upon  the  holder  of  the  assigned  certificate  who  did  not 
consent  to  the  issuance  o£  the  preferred  shares." 

In  Kent  v.  Quicksilver  Company  *  the  court  addressmg  itself  to 

the  question  now  before  us,  spoke  as  follows : 

There  arises  the  query  whether  there  was  power  in  the  oorporation 
to  d!g^;ii^g«^«^  between  tiie  stockholders  in  it  to  form  them  into  two 
classes,  and  to  give  to  one  class  rights  in  the  corporate  property  aad 
business  and  earnings  from  which  the  other  was  shut  out.   We  are 

not  prepared  to  say  that  at  the  first  the  corporation  might  not  have 
lawfully  divided  the  interest  in  its  capital  stock  into  shares  arranged 
in  classes,  preferring  one  class  to  another  in  the  right  which  they 
should  have  in  the  profits  of  the  business.  The  charter  gave  power 
to  nutke  such  by-laws  as  it  might  deem  proper  consistent  with  Con- 
stitution and  law.  We  know  of  nothing  in  the  Constitution  or  the 
law  that  inhibits  a  corporation  from  beginning  its  corporate  a^on  by 
classifying  the  shares  of  its  capital  stock,  with  peculiar  privileges  to 
one  share  over  another,  and  thus  offering  its  stock  to  the  public  for 
subscriptions  thereto.  No  rights  are  got  until  a  subscription  is  made. 
Each  subscriber  would  know  for  what  class  of  stock  he  put  down  his 
name,  and  what  right  he  got  when  he  thus  became  a  stockholder. 
There  need  be  no  deception  or  mistake,  there  would  be  no  tread- 
ing upon  rights  previously  acquired;  no  contract,  express  or  im- 
plied, would  be  broken  or  impaired.  Shares  of  stock  are  in  the 
nature  of  choses  in  action,  and  give  the  holder  a  fixed  right  in 
the  division  of  profits  or  earnings  of  the  company  so  long  as  it  exists, 
and  of  its  effects  when  it  is  dissolved.  That  right  is  as  inviolable  as 
is  any  right  in  property,  and  can  no  more  be  taken  away  or  lessened 
against  the  will  of  the  owner  than  can  any  other  right,  unless  power 
is  reserved  in  the  first  instance,  when  it  enters  into  the  constitution 
of  the  right;  or  is  properly  derived  afterward  from  a  superior  law 
giver.  It  is  manifest  that  any  action  of  a  corporation  which  takes 
hold  of  the  shares  of  its  capital  stock  already  sold  and  in  the  hands 
of  lawful  owners,  and  divides  them  into  two  classes, —(me  of  whieh 
is  thereby  given  prior  right  to  a  leoeipt  of  a  fixed  sum  from  the  earn- 
ings before  the  other  may  have  any  receipt  therefrom,  and  is  given 
an  equal  share  afterward  with  the  other  in  what  earnings  may 
remain,  —  destroys  the  equality  of  the  shares,  takes  away  a  right 

1  78  N.  Y.  167. 

43 


§  26  INCORPORATION  AND  ORGANIZATION  OF  CORPORATIONS.  [PART  I, 

which  originally  existed  in  it,  and  materially  varies  the  effect  of  the 
certificate  of  stock.  It  is  said  that  when  a  corporation  can  lawfully 
buy  property  or  get  money  on  loan,  any  known  assurance  may  be 
exacted  and  given  which  does  not  fall  within  the  prohibition,  express 
or  implied,  of  some  statute.  But  the  prohibition  to  such  action  as 
this  is  found  not,  indeed,  in  a  statute  commonly  so  called,  but  in  the 
constitutional  provision  which  forbids  the  impairment  of  Tested 
rights,  save  for  public  purposes  and  on  due  compensation.  The 
right  which  a  stockholder  gets  on  the  purchase  of  his  share,  and 
the  issue  to  him  of  the  certificate  therefor,  is  such  a  vested  right. 
It  is  contended  that  the  power  so  to  do  is  an  incidental  and  implied 
power  necessary  to  the  use  of  the  other  powers  of  the  corporation, 
and  is  a  legitimate  means  of  raising  money  before  securing  the 
agreed  consideration  therefor.  We  have  already  conceded  that  it  is 
legitimatiB  to  borrow  money  and  to  secure  the  repayment  of  it  with 
a  compensation  for  the  use  of  it.  But  tliat  is  when  it  is  done  in  such 
way  as  to  put  the  burden  upon  every  share  of  stock  sdike,  and  to 
enable  every  share  of  stock  to  be  relieved  therefrom  alike ;  in'  such 
way  as  to  preserve  the  equality  of  right  and  privilege  and  value  of  the 
shares,  and  maintain  intact  the  contract  thereto  with  the  stockholders. 

"  We  are,  therefore,  of  the  opinion  that  there  was  no  power  in  the 
corporate  body,  nor  in  a  majority  of  the  stockholders,  to  provide  by 
by4aw  for  the  malaon  of  a  preferred  stock,  so  as  to  bind  a  minority 
of  the  stockholders  not  assenting  thereto.'' 

In  what  has  been  stated  a  most  important  principle  has  been 
referred  to^  which,  it  is  beUered,  is  controlling  upon  the  question  at 
hand.   This  principle  to  which  reference  is  here  made  is  Hiat  the 

charter  proceeds  frona  the  State,  and  that  nothing  can  be  legally 
done  by  the  corporation  acting  through  its  stockholders  not  au- 
thorized either  by  statute  or  by  the  charter  itself.  Thus  it  is 
clear  Uiat  in  these  States  where  the  statutory  right  to  issue  pre- 
ferred stock  is  not  granted  and  the  charter  itself  (mly  proyides 
for  common  stock,  no  preferred  stock  can  be  legally  issued  by  the 
stockholders  as  against  the  State,  except  by  amending  the  charter 
itself*   This,  too,  even  where  the  stockholders  consent.^ 

This  question  is  likely  to  be  presented  in  a  troublesome  form 
where  cmnmon  stock  has  been  pledged  to  creditors  before  the  pre- 
ferred stock  was  issued. 2 

From  a  careful  examination  of  the  authorities  it  may  be  said 

1  Knoxrilk,  etc.  Co.  v.  City  of  Knox-  •  See  generally  Lockhart  v.  Ytin  Als- 
?ille,98 'tan.  1;  87&  W.888.  tyao^Sl  MielkTft;  MflGs^gor9.Iiiianui60 

A  A 


CHAP,  I.] 


DRAFTING  THE  CHARTER. 


§26 


that  in  order  to  constitute  an  issue  of  preferred  stock  valid  as 
against  all  the  world,  there  must  be  a  statute  authorizing  it,  or 
provision  therefor  inserted  in  the  charter.  To  make  the  issue 
valid  as  against  all  but  the  State,  the  consent  of  all  of  tlie  holdera 
of  common  stock  to  the  issuance  of  preferred  stock  is,  doubtless, 
all  that  is  necessary It  is  hardly  necessary  to  add,  in  addition  to 
the  foregoing,  that  the  total  amount  of  common  stock  added  to 
the '  preferred  stock  so  issued  must  not  m  any  case  exceed  the 
total  authorized  capital  stock  of  the  corporation. 

The  rights  of  holders  of  preferred  stock  depend  upon  the  terms 
of  the  statute  or  of  the  charter  or  by-law  authorizing  it.^  Ordi- 
narily the  power  to  authorize  the  issuance  of  preferred  stock  vests 
in  the  stockholders  and  not  in  the  directors.^ 

Where  a  portion  of  the  stock  of  the  corporaticm  is  issued  as 
preferred,  no  creditor  of  the  corporation  can  object,  provided  the 
money  paid  for  the  stock  reaches  the  treasury  of  the  corporation, 
and  the  dividends  on  the  stock  are  not  to  be  paid  except  out  of 
net  profits.*  Unless  the  statute  provides  otherwise,  preferred 
stockholders  may  be  deprived  of  the  right  which  they  wwM 
otherwise  have,  to  vote  their  stock  in  the  same  manner  as  com- 
mon stockholders.^  This  is  commonly  done  either  by  charter  pro- 
vision or  by  a  by-law  adopted  before  any  preferred  stock  is  issued. 

Preferred  stock  cannot  be  lawfully  issued  with  the  provision  that 
it  shall  bear  interest  absolutely  In  order  to  make  pr^Mrred  stock 
a  lieu  upon  the  corporate  assets  statutory  authority  is  neoessary.^ 

Co^S8K.J.Eq.l81;Higgiiwt;.Lan8ingli,  By.  Co.,  4  K.  &  J.  1 ;  27  L.  J.  Ch.  1; 

154  m.  aOl ;  40  N.  E.  362 ;  Covington,  Corry  v.  Londonderry,  etc.  Co.,  29  Beav. 

ete.  Co.  V.  Sargent,  1  Cinn.   Sup.  Ct.  272;  3  L.  J.  Ch.  290;  Coates  v.  Notting- 

854 ;  Elevator  Co.  v.  Memphis,  etc.  Co.,  ham  Water  Works  Co.,  30  Beav.  86. 

85  Tenn.  703;  5  S.  W.  52;  March  v.  i  Higgins  v,  Lanaingh,  154  lU.  801; 

Eastern  R.  R.  Co.,  43  N.  H.  515 ;  Batei  40  N.  E.  3C2. 

V.  Androwoggln,  etc  R.  R.  Co.,  49  Me.  «  Scott  o.  a*0.  B.  B.CA,tSlfd. 

491 ;  Pkooty  v.  Mich.,  etc.  R.  R.  Co.,  75 ;  49  Atl.  327. 

1  Hun,  655;  Kent  v.  Quicksilver  Min.  »  See  Coit  v.  Freed,  15  Utah,  426  j  49 

Co.,  12  Hun,  53 ;  Jones  v.  Terre  Haute,  etc.  Pac.  533. 

Co.,  57  N.  Y.  196;  Hoyt  v.  Quicksilver  *  First  Nat.  Bank  of  Peoria  v.  Peoria 

Mining  Co.,  78  N.  Y.  159;  8.  0. 9  Week.  Watch  Ca,  191  Dll.  ISS;  SO  N.  B.  8S9. 

Digest,  187,  aff'g  17  Hun,  l«9;  Cnnjv.  •  Lockhart  v.  Van  Aktyae,  31  Mich. 

Scott,  54  Pa.  St.  270 ;  Sturges  v.  E.  Un.  76  ;  MaektntOBh  v.  Company,  32  Fed.a60j 

By.  Co.,  7  De  Gex,  M.  &  G.  158 ;  Matthews  Miller  v.  Ratterman,  47  O.  St.  141. 

V.  Gt.  Northern  R.  R.  Co.,  28  L.  J.  Ch.  375  ;  «  Winscott  v,  Investmeat  Co.,  63  Mo. 

Green's  Brice  Ultra  Vires,  145 ;  Hutton  Ap.  367. 

V.  Scarborough  Hotel  Co.,  2  Drew  &  Sim.  Continental  Troat  Co. «.  ToMo,  Cte. 

514;  Hook  v.  Qt.  Weatem  By.  Ca,  3  By.  Co.,  72  Fed.  9S. 
L.  B.  Ch.  Ml;  HMiy  v.  Gt  Northm 


§  28  mOOBFOEATION  AND  OBOAHIZATION  Of  €N»P0EAn01l&  [PAST  I. 


§  27.  Powwr  to  dttmniB  Hbm  Oofponito  Pmpoati.  —  In  the  earljr 
days  the  right  of  amendment,  when  the  same  related  to  altering 

the  original  purposes  of  corporations,  was  jealously  guarded  and 
limited  both  by  statute  and  bj  judicial  construction.  In  later 
years  there  has  been  eTUOiGed  greater  liberality  in  this  regard,  as 
evidenced  by  graniaag  to  corpcMralionB  nnlimited  power  gi  amend* 
ment.^  The  only  real  difficulty  in  this  connection  arises  when 
an  attempt  is  made  to  so  completely  change  the  original  purposes 
for  which  a  corporation  was  formed  as  in  effect  to  create  a  new 
ecnrporation.  Under  the  Pennsylvania  Incorporation  Act  gov- 
erning amendments,  it  was  h^d  that  this  coold  not  be  done.^ 

The  presmit  attiMIe  of  the  courts  on  iliis  snbjeet  is  well  shown 
by  a  recent  New  Jersey  decision,  —  that  of  Meredith  v.  New  Jersey 
Zinc  &  Iron  Company.^  In  this  case  the  right  of  amendment, 
even  when  producing  fundamental  changes  in  the  corporate  pur- 
poses, was  soslained.* 

It  appears  clear  that  mid^  the  liberal  power  of  amiNidment 
existing  to-day  in  the  majority*  of  the  States,  any  changes  may  be 
made,  no  matter  how  fundamental,  by  the  consent  of  all  the 
stockholders.  And  where  the  matter  is  simply  one  between  the 
corporation  and  the  State,  the  right  to  make  such  an  amendment 
cannot,  in  ^  States  referred  to,  be  qoestkmed  wh^  adopted  by 
the  requisite  number  of  stockholders. 

§  28.  Power  to  change  Number  of  Directors.  —  Only  in  those 
States  where  the  number  of  directors  is  required  to  be  fixed  in 
the  articles,  is  it  necessary  to  have  statutory  authority  to  change 
the  same.  In  oth«r  States  the  matter  of  amendm^t  may  be 
regulated  by  the  by-laws.  HowcTer,  in  the  larger  number  of  the 
Commonwealths,  the  power  to  amend  the  articles  with  reference 
to  changing  the  number  of  directors  is  required  to  be  based  upon 
express  statutory  authority  so  to  do.^ 

1  See Ftet IIL, Table 8, page  578.  elH;  S8  H.  W.  113;  Stickle  v.  Liberty 

«  Jn  re  Pennsylvania  Bottling  Co.,  19  Cycle  Mfg.  Co.  (N.J.  Eq.),  32  Atl.  708; 

Pennsylvania  County  Court  Reports,  593.  Banet  v.  Company,  13  111.  504;  Boss  v. 

See  also  State  v.  Tajlor,  53  Iowa,  759 ;  6  Company,  77  111.  134 ;  Pac.  Ry.  Co.  v.  Ren- 

N.  W.  39.  shaw,  18  Mo.  210  ;  Ashton  v.  Burbank,  2 

>  Meredith  v.  Company,  59  N.  J.  Eq.  DilL  (U.  S.)  435;  Del  By.  Co.  v.  Thorp,  1 

2S7;  44  AH.  SS.  See  alto  tee.  112,  jml,  HBfit(Del),149;  M.B.B7.Co.«.8iiIlivaB, 

*  See  also  Grand  Birer  College  v.  Rob-  37  Ga.  240 ;  Com.  v.  Cullen,  13  Pa.  St.  133. 

ertson,  67  Mo.  App.  329 ;  Mercantile  State-  ^  See  Part  III.  Table  16,  page  586 ;  also 

ment  Co.  v.  Kneal,  51  Minn.  263  ;  53  N.  W.  see  Matter  of  GriflBng  Iron  Co.,  63  N.  J. 

632  ;  Bowie  v.  Grand  Lodge,  99  Cal.  392 ;  Law,  168;  41  Atl.  9311 ;  63  N.  J.  Law, 

84  Pac.  103 ;  Day  v.  Company,  75  la.  357 ;  46  Atl.  1097. 

46 


CHAP.  I J 


DRAFTING  THE  CHARTER, 


§30 


§  29.  The  Power  to  change  the  Corporate  Domicile  and  Principal 
VlMom  of  BiwbMM.  —  As  will  hereafter  be  seen,  it  is  essential  to 
corporate  existence  that  the  corporation  should  have  a  home.i  It 
is  the  naming  of  the  domiciliary  office  in  the  articles  which  fixes 
the  residence  of  the  corporation  for  jurisdictional  purposes,  and 
fixes  the  usual  place  for  holding  stockholders'  and  directors'  meet- 
ings. If  it  is  desired  to  change  the  domicile,  or  if  the  location  of 
the  corporation's  principal  place  of  business  is  to  be  transferred 
from  one  place  to  another,  an  amendment  to  the  articles  must 
be  had  under  legislative  sanction  .2  It  should,  however,  be  noted 
in  this  connection,  that  the  corporation's  domicile  and  its  princi- 
pal place  of  business  are  not  necessarily  one  and  the  same  thing.* 

Again,  if ,  as  is  the  case  in  some  States,  the  name  of  the  agent  - 
upon  whom  process  upon  the  corporation  may  be  served,  is  re- 
.  quired  to  be  set  forth  in  the  articled,  in  order  to  lawfully  sohsti- 
tute  a  new  agent,  an  amendment  to  the  articles  is  necessary, 
made  pursuant  to  statutory  authority  given  in  the  premises.* 

§  80.  Fowwr  ta  mo^pm  aaA  oBftim  a  Ltoa  upon  Stock  to  se- 
onre  the  Paymoat  of  Debt*  Dm  tiM  Ccwpiiiatlon.  —  In  a  large 
number  of  the  States  statutes  exist  expressly  granting  to  eovr 
porations  the  right  to  enforce  a  lien  upon  the  stock  of  its  members 
for  the  purpose  of  securing  the  payment  of  debts  due  from  such 
members  to  the  corporation.* 

The  courts  are  not  by  any  means  in  entire  agre^n^t  as  to 
whether  statutory  authority  to  enforce  such  a  lien  is  essential  to 
its  validity.  Some  courts,  of  excellent  repute,  maintain  the  affiron- 
ative,  and  others  take  the  opposite  view.^  It  seems  fairly  certain 
that  at  common  law  such  a  right  did  not  exist  J 

The  true  view  appears  to  be  that  while  at  common  law  a  cor- 
poration had  no  lien  on  the  shares  of  its  <»pital  stock  for  the 
debts  due  it  from  the  stockholders,  nevertheless  such  a  lien  may 
be  acquired  either  when  given  by  statute  or  when  such  right  is 

1  See  post,  sec.  54.  •  See  Part  HI.  TaMe  9,  page  57». 

a  See  Stickle  v.  Liberty  Cycle  Mfg.  «  Coitdlo  ».  Gompany,  69  N.  H.  405,  a 

Co.  (N.  J.  Bq.).  «8  AtL  76S;  KemMtt  AU.  640;  Young  v.  Vough,  23  N.  J.  Eq. 

V.  Company,  68  K.  H.  432;  39  Ati.  685  ;  8^5;  Moore  v.  Bank,  52  Mo.  377  ;  In  re 

Harris  y\McGregor,  29  Cal.  124.  Klaus,  67  Wis.  401 ;  29  N.W  582  ;  Farm- 

8  Van  Etten  v.  Eaton,  19  Mich.  187;  era',  etc.  Bank,  v.  Wasson,  48  la.  336; 

McConuell  ».  Company  (Mont.),  74  Pac.  Cont.  T.  R.  Co.  v.  Toledo,  etc.  Ry.  Co.,  72 

194.  92. 

*  See  Johnaon  ».  Haaon  Lodge,  21  Ky.  »  Brinkerbofl,  etcCo.».  Osnmr,118 

LawBcp.  498;  &ia  W.6Sa  Ma  447;  M&W.129. 

47 


§dl  IMCOBPOaAIIOM  AND  OBOANIZAUON  OF  COBPORAHONS.  [PABT  I. 


preserred  by  inserting  provisions  therefor  in  the  Articles  of  Incor- 
poration,  or  by  the  passage  of  a  ralid  by-law,  or  by  inserting  a 
provision  therefor  in  the  stock  certificates.^ 

§  31.  Power  to  levy  Assessments  against  the  Stockholden  with 
the  Right  to  forfeit  their  Stock  for  Non-payment  thereof.  —  With 

some  few  exceptions  the  right  to  forfeit  stock  for  non-payment  of 
valid  assessments  levied  against  it  is  preserved  by  statute  in  most 
df  the  States  and  Territories.*  Even  in  the  absence  of  snch  statute 
the  right  to  forfeit  stock  for  non-payment  of  valid  assessments  when 
given  to  the  corporation  by  its  by-laws  will  probably  be  enforced  by 
the  courts.  In  any  event  the  common  law  remedy  would  exist, 
giving  the  corporation  the  right  to  recover  judgment  against  the 
delinquent  stocklu^ers  for  the  amount  of  such  assessments.' 

In  all  cases  the  right  to  forfeit  stock  is  considered  to  be  merely 
a  cumulative  remedy.*  The  right  to  levy  assessments  upon 
stockholders  does  not  exist  after  payment  by  such  stockholders 
for  their  stock  in  full,  unless  the  power  to  do  so  is  conferred 
either  by  statute,  by  Hie  articles  of  incorporation,  or  by  the  unani- 
mous consent  of  all  the  stockholders.^  But  even  in  the  absence  ' 
of  express  power  to  declare  a  forfeiture  of  stock  for  non-payment, 
a  corporation  may  sue  for  amount  of  subscription  to  the  capital 
stock,  and  on  failure  to  collect  the  amount  subscribed  may  secure 
payment  by  sale  of  stock  subscribed.^ 

On  the  general  subject  of  assessments  the  followhig  may  be  said : 
provisions  for  the  forfeiture  of  capital  stock  for  the  non-payment 
of  assessments  must  be  just  and  reasonable  in  order  to  be  valid.^ 
The  terms  of  the  statute  in  any  event  must  be  strictly  complied 
with.^  The  power  to  levy  assessments  rests  in  the  durectors  by 
virtue  of  thehr  office  and  not  in  the  stockholders.*  Even  where 

1  Union  Bank  v.  Laird,  2  Wheaton  Neb.  642 ;  79  N.  W.  560;  Duluth  Club  v.  - 
(U.  S.),  390;  St.  Louis  Per.  Ins.  Co.  v.  McDonald,  74  Minn.  254;  76  N.  W.  1128; 
GoodfeUow, 9  Mo.  149;  Van  Siuid* v.  BUnlc,  Slate  v,  Aaiociation,  S8  N.  J.  Law,  195 ; 
S8  Cobb.  144;  Saigrat  v.  Inmnraace  Co.,  SaUiraa  Ca  Clnb  v.  Butleri  S6  N.  T. 
25  Mass.  90.  See  also  Atchison  Bank  v.  Miscellaneous  Reports,  306  ;  Mayberry  v. 
Durfee,  118  Mo.  431 ;  24  S.  W.  133  ;  V.  G.  Meade,  80  Me.  27  ;  12  Atl.  635 ;  Price's 
B.  Co.  V.  Bloede,  84  Md.  129 ;  34  Atl.  1127 ;  Appeal,  106  Pa.  St.  421 ;  Weeks  ».  Corn- 
Bishop  V.  Globe  Co.,  135  Mass.  132.  pi^iy,  55  N.  Y.  Sup.  Ct.  1. 

*  See  PUrt  III.  Table  17,  page  587.  •  Chase  v.  Company,  5  Lea  (Tenn.),416i 

*  Saa  Joaquin  «.  Beeeher,  101  CaL  70;     '  Critsej  p.  Cooke,  67  Kaa.  SO ;  73  FUe. 
SSFm.849.  541. 

« M. F.  a N.  Co. V.Hall,  121  MaM.97S;  »  P.  G.  T.  B.  Co. «.  GaliMB,  11  Mel- 
Raymond  V.  Caton,  24  III.  123 ;  LeMepi  9,  calf,  1. 

Architects'  Co.,  4  La.  Ann.  3 1 6.  *  Chouteau  Ins.  Co.  v.  Fkjd,  74  Mo.  2S& 

*  Enterprise  Ditch  Co.  v.  Moffitt,  58 

48 


CHAP.  I.] 


])SAffni<l  THE  CHABfBL 


f  M 


the  statute  expressly  gives  power  to  the  stoekholders  to  levy 

assessments  they  may  doubtless  delegate  this  power  to  directors.* 
D hectors,  however,  canuot  lawfully  delegate  such  power  to 
ministerial  officers.^ 

§  32.  Pow«r  to  antiiorlae  Voting  by  Ptoxy  at  Stookboldm' 
MeetiiigB. — At  eommoii  law  the  right  of  stockholders  to  vote 
by  proxy  was  not  recognized.  The  riglit  in  order  to  be  available 
must  be  granted  either  by  statute,  charter,  or  appropriate  by-law.^ 
Voting  by  proxy  is  not  however  per  se  unlawful.*  Tlieref ore  tlie 
right  may  be  secured  to  stockholders  by  appropriate  by-law  duly 
passed  even  without  a  statute  authorizing  it^ 

§  33.  Power  to  permit  ComalatiTe  Voting  at  Election  of  Direc- 
tors. —  The  riglit  of  cumulative  voting  exists  where  a  stockholder 
has  a  number  of  votes  equal  to  the  number  of  shares  held  by  him 
multiplied  by  the  number  of  directors  to  be  chosen,  and  is  allowed 
to  cast  or  distribute  them  as  he  sees  fit.  The  purpose  thereof  is 
to  secure  minority  representation  on  the  board  of  directors.  To 
authorize  cumulative  voting  the  right  miist  be  preserved  either  by 
constitutional,  statutory,  or  charter  provision  or  by  the  pass^e  of 
a  by-law  looking  to  that  end.^ 

If  the  right  is  conferred  absolutely  by  constitutional  or  statu* 
tory  provision,  it  cannot  he  taken  away  by  means  of  a  by-law 
or  resolution  denying  such  right  to  stockholders.' 

In  twenty-one  of  the  Commonwealths  the  right  to  cumulate 
votes  is  secured  to  stockholders  either  by  constitutioiial  enact- 
ment or  by  statutory  provision.® 

§  34.  Power  to  imam  Stock  as  fall  paid  In  Haohaaga  for  Piopeity 
or  Services.  —  In  the  quaint  wording  of  an  English  case,  "stock 
must  be  paid  for,  in  the  absence  of  constitutional  or  statutory 
provision  providing  otherwise,  "  in  meal  or  in  malt ; "  that  is,  in 
money  or  in  money's  worth.^  Forty  of  the  States  have  enacted 
laws  authorizing  the  payment  of  stock  not  only  in  cash  but  in 

1  Bives  V.  Companj,  30  Ala.  92.  ®  Pierce  v.  Commonwealth,  104  Pa.  St. 

*lnn  County  f^Oatiae  L.  &  D.  Co.,  150;  Schmidt  v.  Mitchell,  101  Kj.  570; 

L.  R.  9  Ch.  691.  41  S.  W.  929;  State  v.  dtocUej,  45  O. 

«  Harvey  v.  Company,  118  N.  C.  693;  304;  13  N.  E.  279  ;  State  v.  Greer,  78  Mo. 

24  S.  E.  489  ;  People  v.  Crossley,  69  111.  188;  Baker's  Appeal,  109  Pa.  St.  461. 

19.5;  McKeer.  Company  (la.),  98 N.W. 609.  ^  Tomlin  v.  Bank,  52  Mo.  App.  430; 

*  M.  &  O.  Railroad  Co.  v.  Nicholas,  98  Commonwealths.  Yetter,  190 Pa.  St.  488; 
Ala.  92  ;  12  Sou.  723.  43  Atl.  226. 

•  State  V.  Tudor,  5  Day  (Conn.),  329 ;  *  See  Part  m.  Table  9,  page  579. 
Commonwealth  r.  Detwiler,  131  Pa.  St.  *  DnuBmond'a  GaMi»  L.  B.  4  Ch.  77S. 
S14;  18  AtL99e. 


§  34  INCORPORATION  AND  ORGANIZATION  OF  GORPOaATEONS.  [PART  I. 

services  or  property.^  Some  of  the  States  —  for  example,  Ala- 
bama and  Virginia — have  somewhat  elaborate  provisions  on  the 
subject. 

Thus,  in  Alabama,  stock  may  be  issued  in  exchange  for  all 

such  real  and  personal  property  as  may  be  necessary  or  conven- 
ient for  the  efficient  construction,  operation,  and  maintenance  of 
its  works  or  plants,  lines,  shops,  factories,  or  other  buildings,  or 
for  the  condiiGt  and  maMmgjdmmt  o£  its  business  or  as  its  purposes 
may  require.* 

In  Virginia  the  new  Incorporation  Act  authorizes  subscriptions 

to  the  capital  stock  to  be  paid  for  in  money,  land,  or  other  prop- 
erty, real  or  personal,  leases,  options,  mines,  minerals,  mineral 
ri^^ts,  patent  rights,  rights  of  water  or  easements,  Qontracts, 
labor,  or  serrioes.* 

Even  in  those  few  Ckmimonwealths  where  no  statutes  exist 
authorizing  the  payment  of  stock  in  property  or  ftervices,  the 
courts  will  presume  that  corporations  have  inherent  power  to  pur- 
chase property  and  labor  and  pay  for  the  same  in  stock  instead 
of  monej>  provided  the  transaction  whereby  the  stock  is  to  be 
issued  in  exdumge  for  such  property  or  services  is  made  in  good 
faith  and  no  fraud  is  perpetrated  upon  stockholders  or  creditors.*. 

The  statute  to  prohibit  absolutely  the  payment  of  subscriptions 
to  the  capital  stock  in  property  or  services  must  be  clearly  re- 
strictive in  character.^  The  only  effect  apparently  of  the  absence 
in  particular  CkMomonwealths  of  any  provision,  otmstitutiional  <»r 
statutory,  authorizing  the  payment  of  stock  in  property  ojr  ser- 
vices, is  to  induce  the  courts  to  adopt  what  is  known  as  the  "  true 
value  rule"^  rather  than  the  "good  faith  rule."^  But  in  the 
Ck>mmonwealths  referred  to,  the  character  of  the  property,  labor, 
or  services  accepted  in  exdiange  for  stock  must  be  strictly 
such  as  the  corporation  imder  its  charter  has  the  power  to  ac- 
quire, and  when  property  is  so  taken  it  must  be  fairly  represented 
to  the  corporation  and  for  a  just,  lawful,  and  needed  equivalent 
for  the  money  subscribed.^ 

1  See  Part  m.  Table  10,  page  580.        Smith,  30  N.  Y.  116 ;  Shannon  v  Steveii- 

2  See  Alabama  SessioA  I«ir%  1903,  p.   son,  173  Pa.  St.  419  ;  34  Atl.  218. 

395,  sec.  7,  subdiv.  c.  ^  See  Knox  v.  Company,  86  Ala.  180 ;  5 

'  See  Session  Laws  of  Virginia,  1903,   So.  578. 
dnpu  270.  *  See  post,  see.  104. 

^UM»v.Kmtif,nUa,n;3mikw.     ^  See  pott,  mc.  105. 

•iMke*.  Knapp^TS  M0.SS;  Powtta 

50 


CHAP.  I.] 


DRAFTING  THE  GHABTEB* 


§a5 


§  35.  Power  to  dispose  of  CogpomOm  AMeti  m  wn  Bsfeiiely.^ 

In  ten  of  the  Commimwealths  express  power  is  conferred  npoa 
corporations  to  dispose  of  ilieir  entire  corporate  assets  by  obtain- 
ing the  consent  of  a  certain  percentage  of  the  stockholders  to  such 
disposition.^  Much  controversy  has  arisen  as  to  whether  or  not 
express  statutory  power  is  necessary  in  order  to  authorise  transfer 
by  a  corporation  ol  the  entire  corporate  assets.  At  commoa  law 
neitlier  the  directors  nor  a  majority  of  the  stockholders  had  power 
to  sell  or  otherwise  transfer  all  of  the  property  of  an  acting  and 
prosperous  corporation  able  to  achieve  the  objects  of  its  creation 
as  against  the  dissent  of  a  single  stockholder.^ 

The  view  is  taken  by  the  New  Jersey  court  in  Color  1^  Com- 
pany* that  the  sale  of  the  corporate  assets  as  an  entirety  is  eqniy- 
alent  to  a  dissolution,  and  therefore  can  only  be  done  through 
the  courts  under  statutory  authority.  Many  courts,  however,  take 
'  the  view  that  it  can  be  done  where  it  is  not  in  fraud  of  the  rights 
of  creditors  or  in  yiolation  of  charter  or  statutory  iestri<^n8» 
and  this,  too,  by  a  majority  of  the  stockhdders  against  Hie  dis- 
sent of  a  minority  where  the  oxigencies  of  the  business  seem  to 
require  it.*  Thus,  it  has  been  asserted  that  "  it  is  a  well  settled 
rule  that  a  strictly  private  corporation  has  the  same  right  to  dis- 
pose of  its  property  that  an  individual  has,  and  that  when  insol- 
vent or  in  a  failing  condition,  it  may  s^  all  thereof  without 
the  consent  of  all  of  ihe.  stockholders.  It  is  the  general  rule, 
however,  that  neither  the  directors  nor  a  majority  of  the 
stockholders  of  a  corporation  have  power  at  common  law  to 
sell  or  otherwise  transfer  all  its  property  while  the  corporation 
is  a  going,  pro^erons  concern  against  the  dissent  <^  any  share- 
holder.*'» 

It  may  be  added  in  this  connection  that  the  right  to  exist  as  a 

V.  Mvnniy,  3  N.  T.  App,  Dir.  S7S;  88  Co.  v.  M.  O.  P.  Co.,  89  IM.  5S9;  MefeoOl 

N.  Y.  Sup.  233;  Id.  157  N.  Y  717;  53  v.  A.  S.  F.  Co.,  122  Fed.  115;  Tnm  9. 

N.  E.  1130 ;  Kimball  v.  Company,  69  N.  H.  Company  (la.),  99  N.  W.  290. 
485;  45  Atl.  253;  Montgomery  v.  Com-       »  64  N.  J.  Eq.  117  ;  53  Atl.  680. 
pany,  48  N.  Y.  App.  Div.  12;  62  N.  Y.       *  Treadwell  y.  Company,  7  Gray  (Mass.), 

Sup.  606;  Id.  168  N.  Y.  657;  61  N.  £.  393;  Martin  v.  Zellerbach.  38  CaL  300; 

1131.  Mineis'  IKteh  Co.  v.  ZellerbMl^  87  CaL 

1  See  Fvt  m.  Table  %  page  379.  548 ;  Feathenfeonhiiiigh  v.Coaipaiij,  L.  R. 

^  Forrester  v.  Company,  21  Mont.  544;  1  Eq.  318;  Bartholomew  «.  Coa^Mgr.  ft 

55  Pae.  229 ;  Idem,  74  Pac.  1088 ;  People  Conn.  521 ;  38  Atl.  45. 
V.  Ballard,  134  N.  Y.  269 ;  32  N.  E.  54 ;       6  Xraer  V.  Company  (la.),  99  K,  W. 

California  Bank  v.  Kennedy,  167  U.  S.  290. 
862  ;  4SL.E.  198;B.&M.C.  C.&S.  M. 

51 


§86  INCOBPOIUIION  IW  OBGANIZAXION  OF  COfiPOBilXlONS.  [PART  I. 

eorpomtion  is  not  alienable.^  The  sale  of  all  the  corporate  prop« 
erty  does  not  operate  to  disstdye  the  eprporation.^ 

§  36.  Power  to  ToliiBtarlly  dissolve  tbe  Corporatioii  witbout 

Recourse  to  the  Courts.  —  The  dissolution  of  a  corporation  is  a 
peculiar  function  that  rests  primarily  in  the  legislature,  and  is 
conferred  npon  courts  or  upon  the  corporation  itself,  only  by 
explidt  legislatiTB  autliority.^  Stockholders,  in  the  absence  ol 
statutory  provision,  cannot  extinguish^  the  corporate  charter  or 
dissolve  the  corporation,  nor  can  a  court  of  equity  accomplish  a 
similar  result  at  their  instance.*  In  all  the  States  some  provision 
is  made  for  dissolution  of  corporations.  For  example,  in  Alabama, 
Connecticut,  New  Jersey,  North  Carolina,  Virginia,  and  West 
Yirginia  the  ineiMrponitOrs  have  the  right  to  surrender  the  chmrter 
before  organization.  In  twenty-seven  of  the  Commonwealths 
corporations  may  be  dissolved  under  statutory  authority  without 
recourse  to  the  courts.^ 

The  doctrine  that  dissoluti<m  can  only  be  effected  by  the  joint 
act  of  the  State  and  eorporaticm  is  set  forth  in  a  Massachusetts 
ease  as  follows:®  Charters  are  in  many  respects  compacts  be- 
tween government  and  corporators.  And  as  the  former  cannot 
deprive  the  latter  of  their  franchises  in  violation  of  the  compact, 
so  the  latter  cannot  put  an  end  to  the  compact  without  the  con- 
sent of  the  former.  It  is  equally  obligatory  on  both  parties. 
The  surrender  of  the  charter  can  only  be  made  by  the  formal  act 
of  the  corporation ;  and  will  be  of  no  avail  until  accepted  by  the 
government.  There  must  be  the  same  agreement  of  the  parties 
to  dissolve,  that  there  was  to  form  tlie  compact  It  is  the  accept- 
ance which  gives  efficacy  to  the  sonender.  Dissolution  of  a 
corporation,  it  is  said,  extinguishes  all  its  debts.  The  power  to 
dissolve  itself  by  its  own  act  would  be  a  dangerous  power,  and  ono 
which  cannot  be  supposed  to  exist."  ^ 

In  this  connection  it  may  be  observed  that  the  stockholders 

1  Detioik  Citiaeiw'  Street  Bj.  Co.  v.      «  Oldf  9.  Compeiiy  (MaM.),  70  N.  E. 

CommOQ  Coaocil,  125  Mich.  673 ;  85  N.  W.  1022. 

96;  Pearce  v.  R.  R.,  21  How.  441  ;  16       *  Benedict  v.  Companj,  49  N.J.  Eq. 

L.  E.  184;  State  ».  Company,  40  Kan.  235  ;  23  Atl.  485. 

96 ;  19  Pac.  349.  '       *  See  Part  III.  Table  8,  page  578. 

s  Miners'  Ditdi  Co.  v.  ZeOerbAch,  37      *  Boston  Glan  Mannfactory  Co.  r. 

Gil.  543;  SnOiviii  »*  CoaifMgr>  99  GaL  Laagckm,  84  Ffdu  49. 
459.  See  also  Daviij;.Craipai^,  87  .Allk 

6  Sou.  140. 


$2 


CHAF.  L] 


PBAFTIN6  THE  CHABTES, 


alone  have  |>ow«p  to  surrender  the  charter.^  It  will  be  re- 
membered, of  course,  that  the  expiration  of  the  time  limited  bj 
the  charter  as  a  corporation's  term  of  existence  is  held  in  most 
jurisdictions  to  result  in  the  dissolution  of  such  a  corporation.' 
But  neither  insolvency  nor  sale  of  all  of  the  corporate  property, 
nor  cessation  of  business  operates  to  dissolve  the  corporation.^ 

But  in  the  absence  of  any  provision  in  tlie  charter  limiting  cor- 
porate existence,  the  corporation  is  entitled  to  perpetual  Ml^*  K 
the  articles  provide  for  a  longer  period  of  corporate  existence  than 
the  law  allows,  the  excess  is  void.^  In  many  of  the  States  statutes 
exist  providing  that  the  corporation  shall  continue  in  existence 
for  periods  ranging  from  three  to  five  years  after  the  expiration 
of  the  time  limited  for  its  existence  for  the  purpose  of  windmg  up 
its  affairs.^ 

A  majority  of  the  States  delegate  to  the  courts  the  power  to 
dissolve  the  corporation  on  application  of  stockholders  or  credi- 
torsJ  The  fact  that  certain  States  make  the  directors  trustees 
for  creditors  on  dissolution  does  not  necessarily  take  away  the 
jurisdiction  of  courts  of  equity  to  appoint  a  receiver  •  Many 
States  have  statutes  providing  that  upon  the  expiration  of  the  time 
limited  by  their  charter  as  the  duration  of  their  corporate  exist- 
ence, they  shall  nevertheless  be  continued  for  a  certain  period  of 
time  in  order  to  permit  of  the  winding  up  of  the  coiporalo  affairs. 
Without  such  statutory  provisions  suite  cannot  bo  mamtained 
against  the  corporation  after  such  period  has  expired.* 

§  37.  Power  to  insert  in  the  Charter  Provisions  for  the  Regula- 
tion of  the  Internal  Affairs  of  the  Corporation,  —  The  incorpora- 
tion acte  of  eighteen  of  the  States  contain  provisions  relative 
to  the  contents  of  certificates  of  incorporation,  authorisuig  the 

insertion  therein  of  provisions  for  the  regulation  of  the  business 
of  the  corporation,  or  for  the  purpose  of  defining  or  limiting  the 
powers  of  the  corporation,  its  officers,  directors,  and  stockholders.^^^ 

1  Jones  V.  Bank,  10  Col.  464;  17  Pac.  also  Foster  v.  Bank,  16  Mass.  245;  Nash- 

272 ;  Barton  y.  Association,  114  Ind.  226 ;  ville  Bank  u.  Petway,  3  Hum.  (Teun.)  522. 

16  N.  E.  486.  'See  Miner  v.  Company,  93  Midi.  97 ; 

«  Mason  v.  Company,  25  Fed.  882.  SS  N.  W.  918 ;  Wheeier    Oompuij,  14S 

Davis  V.  C6mpaay,87  iOa.  88S ;  S  So.  lU.  197 ;  32  N.  E.  420. 

140.  »  City  Pottsiy  Ca  «.  TatM,  37  N.  X 

*  F.  L.  S.  Co.  V.  Clowes,  3  N.  Y.  470.  Eq.  543. 

6  People  V,  Cheeseman,  7  Col.  376;  3  »  Nelson  »>.  Hubbard,  96  Ala.  238;  U 

Pac.  716.  Sou.  428. 

6  See  Part  m.  Table  ,17,  page  587 ;  see  See  Ptet  m.  TMd  10,  page  5Sa 

53 


{  87  mCOBPOSATION  AND  OBOANIZATiaM  OF  00BF0BATI0N8.  [PABT  I. 

TJnlesB  the  law  expressly  permits  the  insertion  of  such  provisions 
ill  the  certificate  of  incorporation,  State  officials  are  justified  in 
refusing  to  accept  and  file  certificates  containing  such  provisions. 
This  generally  on  the  ground  that  in  the  absence  of  statutory 
proTiaioii  so  anthoriang,  they  are  properly  the  subject  of  by-laws 
and  not  proper  for  insertimi  in  Hie  certificate  of  incorporation.^ 

Leaving  out  of  consideration  the  fact  of  acceptance  by  State 
officials,  and  approval  by  them  of  certificates  of  incorporation 
containing  such  provisions  as  ai*e  here  referred  to,  when  there  is  no 
statute  aiithoriamig  the  same,  ^  following  may  be  said:  The 
general  teat  as  to  wheHier  proTistons  not  called  for  by  the  statutes 
are  valid  when  inserted  in  certificates  of  incorporation  must  be 
determined  from  their  character.  If  they  are  not  powers,  but  are 
merely  in  the  nature  of  by-laws,  they  are  invalid  as  not  being 
called  for  by  the  statute.  If  they  are  powers,  but  not  authorized 
by  statute,  to  permit  su^  inserticm  in  the  certificate  of  incorpora- 
ti<m  would  be  equivalent  to  saying  that  the  legislature  had  clothed 
the  incorporators  with  a  number  of  their  legislative  functions.^ 
On  this  general  subject  the  opinion  of  the  Supreme  Court  of  Ala- 
bama in  a  leading  case  in  that  State  is  instructive :  "  It  is  appar- 
ent," observes  the  coorfc,  ^^that  the  creation  of  corporations  under 
general  law  rather  than  by  special  act  was  not  intended  to  work 
any  essential  change  in  their  nature  and  character.  Whether 
deriving  existence  from  a  special  law,  or  from  incorporation  under 
the  general  law,  the  corporation  is  an  artificial  being  of  legisla- 
tive creatifflEi,  having  no  other  powers  or  properties  than  such 
-as  the  law  oonf era,  or  which  may  be  incidental  to  tiieirvery  ex* 
istence.  The  mode  of  incori)oration  the  statutes  have  carefully 
prescribed.  The  persons  proposing  to  be  incorporated  must  file 
and  cause  to  be  recorded  in  a  designated  public  office  a  declaration 
in  writing,  stating  the  name  of  the  corporation,  the  objects  for 
which  it  is  formed,  the  amount  of  the  capital  stock,  the  number 
of  shares  into  whidi  it  is  divided,  the  names  ci  tiie  stockholders, 
and  the  number  of  shares  each  may  hold.  The  office  and  the 
effect  of  the  declaration  the  statutes  do  not  leave  in  doubt  — 

1  Jure  Applicttioii  for  charter,  10  Fhfl.  N.  T.  M6;  O.  L.  D.  Co.  v.  FerkiiM 

Bop.  ISO;        Felt  «.  GMdner,  54  IMc  {Ttaam),  S6  a  W.  t56;  Albnghft  v.  Amo- 

701 ;  75  N.  W.  874;  Bent  t;.  Underdown,  60  tkiAm,  102  Pa.  St.  411 ;  Shon  *.  Aral- 

N.  E.  307  ;  156  Ind.  516 ;  Heck  v.  McEwen,  strong  (Tenn.),  59  S.  W.  790. 

12  Lea,  97 ;  T.  A.  L.  Co.  v.  Massey,  56  «  People  ex  rel.  v.  C.  G.  T.  Ck).,  130  BL 

8.  W.  35 ;  E.  P.  S.  Co.  V.  Yangliaii,  14  268;  22  N.  £.  798. 

54 


CHAP.  I.] 


nSAFfmO  fHB  CHABTEB. 


§a8 


when  recorded,  the  persons  signing  it  and  tibeir  snooessors  beoome 

a  body  corporate  by  the  name  stated  therein  and  with  the  powmi 
conferred  by  law.  It  is  an  acceptance  by  the  corporation,  under 
the  name  designated,  for  the  objects  expressed,  of  the  corporate 
powers  and  capacity  the  law  confers,  and  a  statement  of  the  prin- 
cipal constituents  of  the  corporation, — the  amount  of  the  capital 
stock,  the  names  of  the  stockholders,  and  the  quantity  of  interest 
each  has  in  the  capital  stock.  There  is  no  authority  of  law  for 
introducing  more  into  it,  and  if  more  be  introduced,  it  is  mere 
surplusage,  not  adding  to  or  detracting  from  the  force  of  the 
deelaralion.  A  controlling  purpose,  as  we  suppose,  in  anthorizmg 
or  in  compelling  the  creation  of  corporations  under  general  laws, 
is  to  secure  uniformity  and  equality  of  corporate  powers,  func- 
tions, and  privileges ;  that  all  corporations  of  the  same  class, 
formed  for  like  purposes,  should  possess  the  same  capacities 
and  properties,  and  exerdse  and  enjoy  the  same  franchises  and 
privileges.  Unless  it  was  intended  to  work  a  radical  change  in 
the  nature  and  character  of  these  artificial  beings,  the  mere  crea- 
tures of  the  law,  and  to  subvert  the  whole  theory  which  has  pre- 
vailed in  reference  to  them,  it  cannot  have  been  contemplated 
that  they  should  for  themselves  create  powers  and  privileges  by 
declaration  or  resemtion,  whether  the  declaration  or  r6servati<m 
is  expressed  in  the  articles  of  incorporation  or  in  the  by-laws 
ordered  by  the  corporators  for  their  government.  Such  declara- 
tions or  reservations  would  soon  become  more  liberal  and  diverse 
than  was  the  liberality  and  diversity  of  the  grants  of  corporate 
powers  by  special  legislative  enactment,  the  evil  it  was  intended 
to  remove.  Of  every  corporation  formed  under  the  general  law, 
the  law  itself  becomes  the  charter,  defines  and  enumerates  the 
powers  which  are  to  be  exercised,  the  nature  and  extent  of  cor- 
porate franchises  and  privileges.  The  declaration  of  incorpora- 
tion, tiie  by-laws  adopted  for  corporate  government,  do  not  form 
the  charter,  or  define  or  enumerate  the  corporate  powers.  These 
are  the  acts  of  the  corporators.  The  charter  is  the  grant  from 
the  sovereign  power  of  the  State,  and  by  that  source  only  can  be 
varied  or  enhyrged.-! 

§  88.  Power  to  aiitboiias  Dfieotoia  to  wOiapt  By-Lms. — in  a 
number  of  the  States  statutes  exist  anthorizhig  ih»  duectois  to 
adopt  by-laws  under  certain  conditions.   The  conditions  here  re- 

1  G.  L.  &  H.  Ins.  Co.  v.  Hamper,  73  Ala.  325. 

55 


§  40  INCOBPOBATION  AHD  OBOANIZATION  OP  COEPOBATIONS.  [PABT  I. 

ferred  to  are  usually  either  that  the  right  referred  to  should  be 
expresalj  inserted  in  the  certificate  of  incorporation,  or,  in  lieu 
thereof,  that  the  atoekholderg  expresalj  delegate  this  power  to 
the  directors.!  Unless  the  statute  or  charter  provides  otherwise, 
the  by-laws  must  be  adopted  by  the  stockholders.*  However, 
where  the  right  to  adopt  by-laws  is  expressly  limited  to  the  direc- 
tors, it  is  exclusive* 

§  39.  Fovw  to  agftori—  Jkppoliitmaiit  of  Baeciitiva  Committoa 
from  tiie  Board  of  Dfreotm. — In  Cbnnecticut,  Delaware,  Kassa* 
chusetts,  Nevada,  New  Jersey,  Virginia,  and  West  Virginia  stat- 
utes  exist  expressly  authorizing  directors  to  appoint  an  executive 
committee  from  their  own  number  to  whom  may  be  delegated,  to 
such  extent  as  shall  be  provided  in  the  by-laws,  any  of  the  powers 
of  the  board  of  directors.  There  has  as  yet  been  no  fair  test  in 
the  courts  as  to  the  validity  of  such  statutes  where  an  attempt  1^ 
been  made  by  the  directors  to  practically  delegate  all  their  powers  to 
an  executive  committee.  A  reasonable  view  of  the  matter  would 
seem  to  be  that  where  the  statute  clearly  conveys  such  power  it  is 
valid  when  exercised  bj  an  executive  committee  duly  appointed 
from  the  full  board  of  directors  porsnant  to  the  statute  in  9iieh 
case  made  and  provided.^ 

The  power  of  the  board  of  directors  is  not  a  delegated  authority, 
and  when  the  transadion  of  the  business  of  the  company  will  be 
ladlitated  by  the  appomtment  of  an  executive  oommittee  such 
appointment  may  unqueslaonably  be  made.^ 

§  40.  Power  to  enlarge  or  diminish  Corporate  Powers.  — The  right 

here  referred  to  becomes  one  of  importance  only  in  those  States 
wherein  it  is  permitted  to  insert  specific  corporate  powers  in  the 
articles  of  incorpOTstion.  The  powers  here  referred  to  are  such, 
for  example,  as  the  right  of  the  Olnrporation  to  acquire  its  own 
stock  ;  to  hold  stock  and  bonds  in  other  corporations ;  to  delegate 
to  directors  power  to  adopt  by-laws,  etc.  It  will  be  found  that 
wherever  such  a  right  exists  the  power  to  amend  will  be  found 
sufficiently  broad  to  permit  of  the  cnlargemant  or  diminishing  of 

1  See  Part  IIL  Table  12, page  588.  fS  H.  B.  467;  Btock,  etc  Co.  v.  Hoi- 

«  See  Nottom  ele.  Ca  V.  Wyw»g,  51  Wi^,S5  Wis.  844;  55  N.  W.  418 ;  Andres 

Jnd.  4;  Saleoi  Bank  9.  Bank,  17  Mass.  v.  Fry,  113  Cal.  124;  45  Fftc  534;  Bank 

1 ;  Watson  v.  Company,  56  Ma  App.  145;  v,  Walton  Iron  Co.,  30  Bull.  (Ohio)  382. 
State  V.  Curtis,  9  Nev.  325.  *  Leavitt  v.  Company,  3  Utah,  265;  1 

»S.E.L.Co.t;.Bank,  127  N.  Y.517;  Fac.  356. 


56 


CHAP.  I.] 


DBAFTINO  THE  CHABTEB. 


corporate  powers  by  complying  with  the  terms  of  the  statute 

relative  to  such  amendments.  ^  ,     ,  ^ 

§  41.  Poww  to  olMui»e  Par  Value  of  Shares.  -  Where  the  charter 
fixes  the  number  and  par  value  thereof,  a  corporation  cannot  in- 
crease or  diminish  the  par  value  of  to  shares  without  legislative 
sanction.2  if  however  the  certificate  of  incorporation  says  nothing 
as  to  the  number  and  par  value  of  shares,  they  may  doubtleM  be 
dianged  by  the  stockholders  of  the  corporation  without  legislative 

sanction.'  ,      ^  ,         ...  4. 

The  legal  effect  <rf  a  change  in  the  number  <rf  shares  without 

any  corresponding  increase  or  decrease  in  the  par  value 

is  to  increase  or  decrease  the  capital  stock,  and  this  can  only  b© 

done  by  permission  of  the  legislature.* 

In  thirty^ix  of  the  States  the  par  value  of  the  capital  stock  may 
be  any  amount,  wMle  m  the  remainder  such  par  value  is  limited 
from  amounts  ranging  from  one  dollar  to  one  hundred  dMm  per 
share.s  In  some  few  of  the  States  it  will  be  n<^  that  the  pro- 
visions of  the  statutes  limiting  amendments  fail  to  authoriae 
changes  in  the  par  value  of  the  shares  of  capital  stock.« 

§  42.  Fow^  of  Bonaholdra  to  TOto  at  Blection  of  Directors.  — 
Very  few  of  the  States  have  enacted  statutes  giving  to  bondholders 
the  right  to  participate  in  the  election  of  directors.  Vii^nia 
and  Delaware  are  the  exceptions  to  the  general  rule.  Most  of  the 
States  provide  that  the  board  of  directors  shall  be  elected  by 
the  stockholders,  and  thus  by  implication  forbid  the  giving  of  the 
right  to  bondholders  to  vote  at  such  election,^  However,  if  neither 
by  constitutional  or  statutory  provision  bcmdholders  are  barred 
from  participating  in  the  election  of  directors,  such  right  may  be 
bestowed  upon  them  either  by  provision  therefor  in  the  charter  or 
by  proper  by-law  duly  adopted.® 

§  48.  Poww  to  <Aawiif7  DiiwrtJow.  —  Ordinarily  the  tenure  of  d*- 
rectors  is  fixed  by  statute,  and  where  so  fixed  these  ^viaions  are  oi 
course  controlling.   If  the  statute  requires  directors  to  be  elected 

1  Peoria,  etc.  Co.  v.  Preston,  35  la.  »  S.  &  K.  Ry.  Co.  r.  Cushing,  45  Me.  534. 
11 5 ;  P.,  etc.  P.  R.  Co.  v.  Griffin,  21  Barb.  *  Droitwich  Patent  Salt  Co.  v.  Cwnon, 
454  ]  Pac.  R.  Co.  v.  Hughes,  22  Mo.  291.  L.  R.  3  Ex.  35. 

2  Droitwich  Patent  Salt  Co.  v.  Curion,  •  See  Part  IIL  TMb  4,  page  565. 
L.  R.  3  Ex.  35 ;  T«.hiimi  r.  Hflls,  6  K«i.  •  See  P*rt  HL  Table  U^page  575 
App.  549  ;  61  Pac  619;  S.M.D.Cot.».  ^  Durkee  v.  People,  IM  IIL  854;  40 

^^^(^)^  ^^^^S^-,.  McDaniel,  22  0.  St.  354. 

57 


§  46  INCORPORATION  AND  ORGANIZATION  OF  CORPORATIONS.  [PART  I. 

annually,  this  bj  implication  prohibits  the  classification  of  direc- 
tors for  terms  in  excess  of  the  statutory  limit.^  In  a  large  num- 
ber of  tbe  Stales  slaMes  exist  exj^atmHj  authorising  dassifieation 
ol  directors.* 

If  the  statute  does  not  require  annual  election  of  directors,  there 
would  appear  to  be  nothing  illegal  in  a  corporation's  classifying  its 
directors  in  any  manner  it  sees  fit  so  to  do,  provided  (in  the  ab- 
sence ol  BiaMtarj  r^^tious)  direetos  hxAd  their  ofilce  at  the 
pleasnre  of  the  corporation* 

§  44.    Power  to   amend  Artioles  before    Organisation.  —  As 

has  already  been  seen,  the  power  to  amend,  if  it  exists  at  all, 
must  be  derived  from  the  legislature.  Very  few  of  the  Common- 
wealths have  granted  to  incorporators  the  right  to  am«id  articles 
of  incorporation  h^ore  organisition.  Sti^totes,  however,  to  that 
effect  exist  in  Alabama,  Connecticut,  New  Yinrk,  New  Jersey, 
North  Carolina,  and  Virginia. 

§  45.  Power  to  surrender  Charter  before  Organization.  —  It  is 

often  an  advantage  to  a  corporation  which  does  not  care  to  avail 
itself  of  the  ri^t  to  actively  engage  in  bosiness,  to  snrrender  its 

charter  to  the  State  before  organization,  without  going  througli 
the  expensive  and  usually  complicated  proceedings  incident  to 
dissolution.  Such  right  is  expressly  given  in  Connecticut,  New 
Jersey,  Nortii  Carolina,  Virginia,  and  West  Virginia.^ 

§  46.  Powwr  ghrm  to  WBumUy  Sto^EhoUtem  to  oooq^  PnrdUMM 
of  their  Holdings  upon  Ooneolidatton. — In  the  Stotes  of  Alabama, 
Connecticut,  Massachusetts,  Delaware,  and  New  York  statutory 
protection  is  afforded  to  minority  stockholders  in  case  the  cor- 
poration has  consolidated  with  another.  The  Connecticut  statute 
may  be  briefly  summarised  as  an  example  of  soch  statotes> 

The  act  pro?idei  that  any  stockholder  in  any  corporation  e(m- 
solidating,  who  at  the  time  of  such  consolidation  objects  thereto 
in  writing,  may,  within  ten  days  after  the  agreement  of  consolida- 
tion has  been  filed  for  record  in  the  office  of  the  Secretary  of 
State,  donand  in  writing  from  the  consolidated  corporation  pay- 
nient  of  his  stock;  and  siMsh  ccnrpormtion  shall  witiun  three 
months  thereafter  pay  him  the  value  of  his  stock  at  the  date  of 

1  State  V.  McCnllongh,  3  Nev.  202.  428 ;  Law  v.  Rich,  47  W.  Ya.  634  ;  35  S.  £. 

2  See  Part  III.  Table  14,  page  584.  858. 

s  Mamma  v.  Company,  8  Fet.  U.  S.  ^  Sec.  79,  chap.  194,  of  the  Session 

iSf;  Taylor  v.HfliaBfli,  14  Fed.  Bep.  498;  Lswiof  190S. 

58 


GHAP.  L] 


nBAFTINO  TBB  CHABTEB. 


§4T 


sueh  consolidation.  In  case  of  disagreement  as  to  the  value 
thereof,  such  value  shall  he  ascerteined  by  liiree  disintmsted 

persons,  to  be  chosen,  one  by  the  stockholder,  one  by  the  directors 
of  the  consolidated  corporation,  and  the  third  by  the  two  thus 
selected;  and  in  case  their  award  is  not  paid  within  thirty  days 
from  this  date  it  shall  become  a  debt  of  said  consolidated  corpora- 
tion and  may  be  collected  as  such.  Upon  receiving  pajment  of 
the  amount  awarded,  such  stockholder  shall  transfer  his  stock  to 
the  consolidated  corporation,  which  shall  dispose  of  it  on  the  best 

terms  attainable.^ 

§  47.  InMmMk  Fowm,  Pdliiltioa  aiiA  BmmMratioii  oC  —  An 

incidental  power  is  one  that  is  directly  necessary  or  proper  to  the 
execution  of  an  express  power,  and  not  one  that  has  a  slight  or 
remote  relation  to  it.^  The  term  expresses  those  powers  which 
flow  necessarily  out  of  the  exercise  of  the  express  powers  con- 
ferred by  statute  or  by  charter.^ 

The  exercise  of  a  power  that  might  be  beneficial  to  the  prin- 
cipal business  of  the  corporation  is  not  necessarily  incident  to  it.* 
The  principal  incidental  powers  may  be  enumerated  as  follows : 
(1)  power  to  make  contracts ;  (2)  power  to  borrow  money  ;  (3) 
power  to  give  and  accept  customary  evidences  of  debt ;  (4)  power 
to  mortgage  or  pledge  real  and  personal  property ;  (5)  pow«r 
of  amotion. 

The  implied  powers  which  a  corporation  has  in  order  to  carry 
into  effect  those  expressly  granted,  and  to  accomplish  the  pur- 
poses of  ite  creation,  are  not  limited  to  such  as  are  indispensable 
for  tiiese  purposes,  but  comprise  all  that  are  necessary  in  the 
sense  of  appropriate,  convenient,  and  suiteble,  including  the  right 
of  reasonable  choice  of  means  to  be  employed.  Acts  of  a  cor- 
poration which  if  standing  alone  or  engaged  in  as  a  business 
would  be  beyond  ite  implied  powers,  are  not  necessarily  ultra  vires 
when  they  are  inddentol  to  or  form  part  of  an  entire  transaction 
which  in  its  general  scope,  is  within  the  corporate  purpose.  The 
validity  of  such  a  transaction  is  to  be  determined  from  ite  general 

1  See  Lanman  v.  Company,  30  Pa.  St.  798 ;  People  ».  CJompany,  175  lU.  125 ;  51 
42 ;  Mowrey  v.  Company,  17  Fed.  Cm.  N.  B.  SSi. 

No.  9891;  4  BimOl,  78;  HUaborg,  etc.  »  SeeU.  M.  Co.  v.  Bank,  2  Col.  248; 

By.Go.9.G«TCtt,5eO.Sl.405;S4N.B.  WriglHi^.  Ha«h«i,  119  ImtSM;  S11I.B. 

493.  907. 

2  Hood  V.  Company,  42  Conn.  112;  *  Nicollet  Nat.  Bank  v.  Company,  71 
People  V,  Company,  130  lU.  268 ;  22  N.  E.  Minn.  413  ;  74  N.  W.  160. 

59 


§  52  INCOBPOBATION  AND  0B6AKIZATI0N  OF  COEFOBATIONS.  [PAB!F  t 


character  considered  as  a  whole  rather  than  bj  segregation  into 
individttal  parts  and  each  regarded  as  distinct  from  the  other.^ 

§  48.  Power  to  make  Contraota.  —  A  corporation  is  a  creature 
of  law,  and  may  do  any  act  or  thing  under  contract  the  same  as 
natural  persons  might  do,  subject  to  the  rights  conferred  on  it  by 
the  law  of  its  creation  or  by  its  charter.^  Where  chartered  in 
one  State  for  any  purpose,  it  may  lawfully  make  a  contract  in 
furtherance  of  that  purpose  in  any  other  State  where  not  pro* 
hibited  by  the  laws  thereof.' 

§  49.  Power  to  borrow  Money.  —  The  power  to  borrow  money 
in  carrying  out  the  purposes  of  the  corporation's  organization  is 
one  of  the  incidental  corporate  powers.^  In  this  connection  it 
may  be  said  that  the  power  to  borrow  money  has  been  held  to 
imply  the,  power  to  issue  bonds.^  However  that  may  be,  in  addi- 
tion to  an  enumeration  in  the  statute  of  the  power  to  borrow 
money,  a  majority  of  the  business  corporation  acts  expressly 
confer  the  right  upon  corporations  to  issue  bonds.^ 

§  50.  Power  to  sftve  ma  aooepfc  OwHtomMj  Bvideaoee  of  Debt  ^ 
This  inddental  power  includes  the  right  of  corporations  to  make 
notes  or  biBs  of  exchange,  to  accept  drafts  and  notes,  and  to  draw 
checks. 7 

I  51.  Power  to  mortgage  and  pledge  Real  and  Personal  Property 
— Every  oorporation  has  the  incidental  power  to  mortgage  and 
pledge  its  real  and  perscmal  property  in  order  to  procure  and 
secure  necessary  loans  to  be  made  to  the  corporation.^  It  is 
sometimes  said  that  a  corporation  has  power  to  pledge  both  its 
issued  and  unissued  shares.^ 

§  62.  Power  of  Amotion.  —  The  power  of  amotion  has  refer* 
ence  to  the  removal  of  offioers  and  directors.   The  term  ^  dis* 

1  C.  O.  N.  6.  F.  Co.  V,  Company,  <0      •  See  Fart  IH  Ttf»]e  14,  p.  584. 
Ohio, 96;  53 N.  E.  711;  Foiltr«.Ceai|iaiiy      ^  Mom  v.  AyenO,  ION.  T.  449 ;  Lneas 

(Mont.),  74  Pac.  938.  v.  Pitney,  27  N.  J.  Law,  221 ;  Smead  ». 

*  Hand  w.  Company,  143  Pa,  St.  408;  Company,  11  Ind.  104;  Strauss  v.  Com- 
22  Atl.  709 ;  People  v.  Company,  70  N.  Y.  pany,  52  0.  St.  59;  Morris  v.  Cheney,  51 
569 ;  MacGinniss  v.  Company  (Mont.),  75  III.  451. 

Pm.  8t.  *  State  9.  Company,  61  Kan.  547  ;  GO 

*  Ban  V.  Conpaaj,  91  Ala^  868 ;  §  Pac  837 ;  Fanaen*  Bank  v.  Company, 
Son.  348.  108  Ey.  447  ;  56  S.  W.  719 ;  SaviagiTraet 

*  See  Ward  v.  Johnson,  95  111.  215;  Co.  v.  Company,  112  Fed.  693. 
Wright».  Hughes,  119  Ind.  324  ;  21  N.E.       »  See  U.  Savings  Ass'n  v.  Seligman, 
•W.  92  Mo.  635 ;  15  S.  W.  630 ;  Burgess  i>. 

*  CoBMaeaweeltlt  v.  Smith,  10  AOea  Seligman,  107  U.  S.  20;  2  S.  Ct.  10. 
(MiM.),  448 r  Snitii  a.  Law,  81  N.  T.  198. 

60 


CHAP.  I.] 


nftAFTIKO  THB  CBABf SB* 


§5a 


franchisement "  has  reference  solely  to  the  deprivation  of  the 
right  to  vote  as  against  stockholders.^  The  right  is  delegated  by 
statute  to  the  stockholders  in  fifteen  of  the  Commonwealths.^  In 
the  absence  of  such  statute  there  is  no  power  in  the  stockholders 
to  remoYe  directors  before  the  expiration  of  their  allotted  terms, 
except  for  cause,  provided  such  terms  are  Exed  by  statute.* 

It  seems  to 'have  been  the  rule  of  the  common  law  .that  every 
corporation  had  an  implied  power  to  remove  directors  for  cause 
when  their  terms  of  office  were  not  prescribed  by  statute.*  In 
New  York  it  has  been  held  that  the  power  to  remove  directors 
may  be  covered  by  by-law.* 

The  main  grounds  which  justify  amotion  where  no  statute 
exists  limiting  the  same,  are  the  conviction  of  crime  on  the  part  of 
directors,  misconduct  in  office,  and  violation  of  statutory  provi- 
sions.* If  the  charter  or  statute  provides  steps  which  must  be 
taken  to  remove  directors,  such  statute  must  be  strictly  foUowedJ 
In  the  exercise  of  this  power  the  stockholders  meet,  charges  must 
be  preferred,  and  the  director  removed  by  a  majority  vote.« 
Equity  will  not  interfere  in  such  matters  in  the  absence  of  usurpsr 
Hon  or  gross  ne^igence.^ 

§  58.  The  Modm  Dootitw  of  mtra  Vlraa.  — To  define  in  a 
general  way  the  ancient  doctrine  of  vUra  vireM  is  to  say  tliat  a 
contract  of  a  corporation  which  is  unauthorized  by  or  in  violatimi 
of  its  charter,  or  entirely  outside  of  the  scope  of  the  express 
purposes  of  its  creation  or  beyond  the  powers  granted  to  it  by  the 
charter  or  by  statute,  is  void  in  the  sense  of  being  no  contract  at 
all,  because  of  a  total  want  of  power  to  enter  into  it;  that  such 
contract  will  not  be  enforced  by  any  species  of  action  in  a  court  of 
justice ;  that  being  void  ab  initio,  it  cannot  be  made  good  by 
ratification  or  by  any  succession  of  renewals,  and  that  no  perform- 
ance on  either  side  can  give  validity  to  the  unlawful  contract,  or 
form  a  foundation  of  any  right  of  action  upon  it.^ 

I  Wlifte     Biwraen,  4  Abb.  P*. ».  8.  •  Rex  v.  Taylor,  3  Salk.  231 ;  R.  E.  G. 

152.  V.  Smith,  10  Wood,  74  ;  DeLacey  v.  Corn- 
s'See  Part  III.  Table  9,  page  "579.  pany.  1  Hawks  (N.  C),  274;  Purdj  v, 
8  Nathaa  w.  Tompkiiw,  82  Ala.  437;  Ass'n  (Mo.  Ap.),  74  S.  W.  486. 

2  So.  747.  •  Baker  v.  Backus,  83  DL  79;  Ptekw. 

4  Fawcette  v.  Charles,  13  Wend.47S.  Grant  LocomotiTe  W<w1m,  40  N  J.  Eq. 

»  Douglass  ».  Company,  118  N.Y.  484;  114;  19  Atl.  62;  Id.  4S  M.  J.  S^.  t41. 

28  N  £  806  !  3 

«  Ilex  V.  Richardson,  1  Burr.  517.  See  Thompson  on  Corporations,  vol. 

»  State  V.  Tnwtee%  etc,  6  lad.  77.        v.  §  5968 ;  for  history  of  doctrme  of  ultra 

61 


§  58  mOOSPOBATION  Am  'OlOAliaATION  OP  CORPORATIONS.  [PART  I. 

The  necessities  of  modern  business  and  the  arrival  by  the  courts 
at  a  better  conception  of  the  true  relations  governing  the  matter, 
have  brought  about  radical  changes  in  the  doctrine  as  here 
stated.  What  we  propose  to  do  in  this  omineetaon  is  to  set  forth 
what  maj  be  termed  the  modem  doctrine  of  tdtra  vires. "  Pre- 
liminary to  this  a  statement  should  be  made  showing  how  the 
doctrine  of  ultra  vires  originated,  and  how  it  came  to  be  applied 
from  time  to  time. 

In  the  early  days  corporations  were  created  mainly  for  public 
purposes,  and  it  was  in  connection  with  quasi-public  corporations 
that  the  doctrine  of  tdtra  vires  first  originated.  In  view  of  this 
fact,  as  has  been  well  stated,  there  was  no  reason  why  the  doc- 
trine should  ever  have  been  applied  to  private  corporati<»is  not 
formed  for  public  purposes.^ 

The  grounds  of  the  old  doctrine  are  stated  by  Judge  Gray  as 
follows:'  "That  the  charter  of  a  corporation  which  contains  its 
grant  of  powers  is  a  public  statute,  which  all  persons  are  bound 
to  take  notice  of  and  be  governed  by ;  tliat  the  restraints  thereby 
established  on  the  alienation  of  the  franchises  of  the  property  of 
the  corporation  are  foonded  cm  eminderations  (rf  public  policy, 
whidi  ndth^  the  corporation  ik>r  any  other  persons  can  be 
allowed  to  evade  or  disregard."  In  a  later  case,  when  sitting 
on  the  United  States  Supreme  Court  bench,  the  same  judge  ob- 
served :  ^  "  The  reason  a  corporation  is  not  liable  on  a  contract 
ultra  vir€9  are  the  interests  of  the  public  that  the  corporation 
shall  not  transcend  the  powers  granted ;  the  interests  of  the 
sto^holders  that  the  capital  stock  shall  not  be  subjected  to  the 
risk  of  enterprises  not  contemplated  by  the  charter,  and  therefore 
not  authorized  by  the  stockholders  in  subscribing  for  the  stock ; 
the  obligation  of  every  one  entering  into  a  contract  with  a  corpora- 
tion to  take  notice  €i  the  1^^  limits  of  its  powers." 

Taming  now  to  this  statement,  attention  should  be  called  to 
those  reasons  which  have  aided  a  great  majority  of  the  courts  in 
evolving  a  new  doctrine  of  ultra  vires  better  suited  to  the  condi- 
tions of  the  present  time.  In  the  first  place,  except  in  the  eme 
of  what  is  known  as  "  qnan^^ohKofiivate  corporations,-'  the 

tmttm  B.  O.  L.  Ga  V.  OsMj,  151  N.  Y.      «  Biefaardson  v.  Sibley,  11  AUen,  65. 
Si;  4ft  N.  B.  StO.  •  Ffttebrntgh.  etc  Co.  ».  K«oknk,  etc 

1  See  Heunesey  v.  Muhleman,  40  H.  T.-  MOgp  Oft,  ISl  U.  &  17 ;  9  &  Ct  77a 
Ai».  DiT.  175 ;  57  N.  Y.  S.  854. 

62 


CHAP.  I.] 


nSAFTIMO  THE  CfiARTEa. 


§53 


public  has  no  diredi  interest  whatCTcr  in  the  nature  of  the  powers 
vested  in  them.    Corporations  are  no  longer  created  by  special 

act,  except  in  a  few  cases,  and  it  would  be  a  poor  rule  which 
would  require  a  stranger  to  take  notice  of  the  contents  of  char- 
ters not  public  and  difficult  to  obtain.  In  modern  times  the 
placing  in  articles  of  incorporatimi  of  a  lai^  number  of  purposes, 
in  some  cases  giving  the  corporation  almost  unlimited  scope  along 
business  lines,  has  practically  removed  the  objections  spoken  of 
above,  to  the  effect  that  capital  shall  not  be  subjected  to  the  risk 
of  enterprises  not  contemplated  by  the  charter. 
"  Turning  now  to  the  changes  already  referred  to,  as  having  taken 
place  in  the  doctrine  of  uUra  vires^  they  may  be  stated  m  the 
form  of  the  following  propositions :  (1)  "  The  claim  that  a  con- 
tract is  void,  because  under  the  charter  beyond  the  power  of  a 
corporation  is  seldom  recognized  as  a  defence  to  an  agreement 
otherwise  objectionable,  and  never  where  it  would  defeat  the  ends 
of  justice  or  become  a  shield  against  wrong ; "  ^  (2)  the  doctrine  of 
ultra  vires  is  not  usually  applied  where  the  party  setting  it  up  has 
received  a  benefit  from  the  unlawful  act  relied  upon  as  a  defence 
(3)  where  the  most  tliat  can  be  said  of  a  corporate  act  is  that  it 
is  an  abuse  of  power,  the  State  alone  can  act  ;^  (4)  the  doctrine 
that  persons  dealing  with  corporations  are  bound  to  take  notice  of 
their  power  is  now  practically  done  •  away  with  by  the  application 
of  the  doctrine  of  estoppel  in  the  case  of  completed  contracts. 

Again,  it  should  be  carefully  noted  that  by  the  fullest  applica- 
tion of  the  doctrine  of  estoppel  where  attempts  have  been  made  to 
set  aside  centrists  on  the  ground  that  they  were  ultra  vire$  of  the 
corporate  powers,  the  courts  have  practically  revolutioniied  the 
doctrine  as  it  once  existed  in  this  country.  The  doctrine  of  es- 
toppel here  referred  to  is  of  the  character  referred  to  by  Lord 
Denman  in  Pickard  v,  Sears,^  where  he  says  that  where  one  by 
his  words  or  conduct  wilfully  causes  another  to  believe  in  the  ex- 
istence of  a  certain  state  of  things,  and  induces  him  to  act  on  ^al 
belief  so  as  to  alter  his  own  previous  position,  the  former  is  pre- 
cluded from  averring  against  the  latter  a  different  state  of  things 
as  existing  at  the  same  time.  By  an  extended  applioation  of  the 

1  Int.  Trust  Co.  v.  Company,  70  N.  H.       »  Bector  v.  Hartford  Deposit  Co.,  190 

118;  46  Atl.  1054;  B.  B.  Y.  O.  Co.  v,  I1LS80;  60  N.  £.528. 
Banley^lSlTteh',  506  ;  50FR.St.6ll.  «  6  Ad.4SL4ii. 

>  Norton  v.  Bank, 61  N.H.SSS{  Swih 
9.  Battle,  7S  N.  H.  4. 


,  §  58  mooBPOBATioir  Jam  <»oaiiization  of  ooepobaiions.  [pabt  t 


doctrine  laid  down  by  Lend  Denman,  the  courts  hold  that  where 

there  has  been  no  express  violation  of  the  law  the  corporation  is 
estopped  by  its  own  contract  or  conduct  from  setting  up,  as  a  de- 
fence to  an  action  to  enforce  such  contract,  that  it  was  not  in  the 
power  of  the  eorporatba  to  make  it.  So  too  the  courts  hold  that 
where  a  private  corporation  ^ters  into  a  ccmtract  in  excess  al  its 
granted  powers  and  has  received  the  benefits  of  the  contract  which 
the  other,  parties  acted  upon,  the  corporation  is  estopped  to  repudiate 
the  contract  on  the  ground  that  it  was  ultra  vires.  Repeatedly  the 
courts  have  held  that  where,  a  contract  with  a  corporation  — 
the  making  of  which  is  beyond  its  chartered  powers  —  has  been 
fully  executed  by  both  parties  to  the  contract,  neither  of  them 
can  assert  its  invalidity  as  a  cause  of  action  as  against  the  other. 

Again,  it  may  be  stated  that  where  a  corporation  has  acted  in 
excess  of  its  granted  powers  or  in  the  face  of  express  or  implied 
statutory  prohibition  it  is  dear  that  there  can  be  no  objection 
raised  on  that  ground  between  it  and  a  private  party,  for  this  can 
only  be  raised  by  the  State  in  a  direct  proceeding  to  forfeit  the 
franchises  of  the  corporation.^  Again,  it  may  be  stated  that  the 
doctrine  of  estoppel,  as  well  as  the  doctrines  of  ratification  and 
confirmation  by  aeqmesoeoce,  apply  under  modem  rules  to  ultra 
vireM  oontracti.' 

An  Ohio  court  has  divided  unauthorized  acts  of  a  corporation 
into  two  classes :  (1)  where  it  has  no  power  to  do  what  it  promises 
or  to  receive  what  is  promised ;  (2)  where  it  has  no  power  to  do 
what.it  promises  but  may  receive  what  is  promised.  In  each  class, 
it  was  said,  if  acticm  is  broof^t,  one  of  tiiree  states  (rf  fact  will 
appear :  (a)  where  it  has  performed  its  promise,  but  the  other 
party  has  not ;  (h)  where  the  other  party  has  performed,  but  it 
has  not ;  (c)  where  neither  party  has  done  all  that  was  promised. 
In  case  1  a  the  corporation  cannot  recover ;  the  contract  has  no 
existence.  In  case  2  a  the  corporation  may  recover  for  perfon&- 
anee  if  it  has  eliminated  the  uUra  vires  element  and  there  is  no 
want  of  mutuality.  In  cases  1  b  and  2  b  what  remains  to  be  done 
is  nMra  vires^  and  neither  party  can  recover.   In  cases  1  c  and 

1  UDion  Nat.  Bank  v.  Matthews,  98  Works  Co.,  44  Fed.  146 ;  Linkanf  v,  Loo- 

U.  8.  621 ;  PnllBUUi  ».  Upton, 96  U.  asSS.  bard,  137  N.  T.  417 ;  83  N.  £.  472 ;  VhoB 

*■  See  Water  Works  Co.  v.  Low,  46  N.  T.  v.  School,  1 60  Mass.  177  ;  35  N.  £.  776  ; 

Sup.  633 ;  Woodruff  v.  Erie  R.  R.  Co.,  93  J.  B.  Farrell  Company  v.  Wolf,  96  Wis. 

N.  Y.  609 ;  Miller  v.  Am.  Mut.  Acci.  Ins.  10 ;  70  N.  W.  289 ;  Smith  ».  Bank  o£  Uew 

Co.,  92  Tenn.  167 ;  Wood  w.  Corry  Water  England,  72  N.  H.  4. 

64 


• 


CHAP.  I.]  wuifnra  THE  mixam.  §  ^ 

2  c  neither  party  can  recover  because  the  contract  is  vUra  writ. 
Recovery  cannot  be  helped  by  promises  of  the  officers.  Pure 
assertion  of  law  cannot  give  rise  to  estoppel.  Nor  is  recovery 
aided  by  Oie  fact  that  a  ecmsideration  was  conveyed  to  an  indi- 
yidual  as  trustee  for  the  ecHrporatkmA 

§  54.  Corporate  Domicile. —Corporations,  like  iiidmdfiala,  iBiisI 
have  a  place  of  abode.^  As  far  back  as  Lord  Coke's  time  a  plaee 
of  abode  was  held  to  be  of  the  essence  of  a  corporation  Unless 
provided  otherwise  by  statute,  the  rule  at  the  present  time  is  that 
eorporations  to  have  any  legal  exigence  muit  have  a  home  within 
the  boundaries  of  the  State  which  creates  it. 

In  the  words  of  Justice  McAdam  in  Kruse  v.  Dusenbury  *  **  A 
corporation  cannot  become  a  tramp.  It  must  have  a  domicile  — 
not  in  theory,  but  in  fact  — within  the  sovereignty  which  created 
it  ...  A  corporation  in  the  natore  of  things  must  have  some 
office  or  place  of  business  in  the  State  where  it  was  incorporated, 
so  that  creditors  may  know  where  to  find  it,  that  they  may  presoit 
and  if  necessary  prosecute  their  just  demands.  The  statute  con- 
templates that  such  place  of  business  shall  exist  not  only  in  name, 
hut  in  fact;  for,  if  the  corporation  has  no  place  of  business  in  the 
stote  where  it  was  incorporated,  it  does  not  affect  the  charter, 
but  it  cannot  have  branch  offices  elsewhere.  Like  a  live  tree,  it 
cannot  consist  of  branches  only,  but  must  take  root  in  its  native 
soil  before  it  can  extend  its  branches  into  other  States." 

Most  of  the  States  have  i^tutes  expressly  requiring  the  main- 
tenance of  a  domiciliary  office  wiiiiin  tiie  State  of  the  corporation's 
origin,  and  failure  to  comply  with  Ihis  requirement  renders  tiie 
charter  of  such  corporation  liable  to  forfeiture  upon  proper  action 

taken  by  the  State.^ 

Thus  in  Minnesota  a  charter  was  forfeited  for  the  failure  on  the 
part  of  the  corporation  to  maintain  a  domiciliary  office  therein. 
In  this  case,6  the  court  observed,    that  independently  of  statote, 

it  is  incumbent  upon  a  private  corporation  to  keep  its  principal 
place  of  business,  its  books  and  records,  and  its  principal  offices  in 

I  Voi  V.  Association,  9  Bull.  (Ohio)  194.   Tex.  80 ;  State  v.  Company,  45  Wis.  579 ; 

*  In  re  Spring  Valley  Water  Co.,  17  Simmons  r.  Company,  113  N.  C.  147 ;  18 
(jjl.  132.  S.  E.  117;  State  r.  Company,  58  Minn. 

«  See  Sutton's  Hospital  Cases,  5  Coke's  330  ;  59  N.  W.  1048 ;  State  ».  Company, 

Rep.253.  69  Kan.  141 ;  H  Pm.  4t2. 

*  19  Wk.  Di.  <N.  Y.)  901.  •  State  ».P.4H.Ii.p0n9Sllim.WH 

*  8eeN.ftS.B.Co.v.FM^U7in.  S9H.W.UMa. 
9U;  85  N.  £.  606;  Stiita  v.  Compmj,  94 

B  65 


§  54  nrooBPOBATioN  and  <»ioaiiization  of  OOBPOBATIONB.  [PABT  I, 

the  State  where  it  is  incorporated,  to  an  extent  necessary  to  the 
fullest  jurisdiction  and  visitorial  power  of  the  State  and  its  courts 
and  the  effiinent  exercise  thereof  In  all  proper  casesi  and  that  a 
f orleitmre  may  be  adjadged  a  nolalioii  ol  ^  eoomoii  law 
obliga^"! 

The  authorities  have  on  more  than  one  occasion  brought 
actions  to  forfeit  charters  of  corporations  for  failure  to  main- 
tain domiciliary  offices  therein.^ 

In  the  ifords  of  chm  courts  a  corporati<ni  ^nnuit  hare  aome 
ixid  <^oe  or  fdaoe  of  tadiieM  in  ibe  Slate  where  it  is  ineor- 
porated,  so  that  creditors  may  know  where  to  find  it"  *  Again, 
the  object  of  naming  the  domicile  is  to  fix  the  place  for  the 
holding  of  stockholders'  and  directors'  meetings,  and  to  fix  a 
location  for  the  books  ol  the  OOTpocation  where  the  stockholders 
and  creditois  nay  denaad  an  isapeeddii  ihereo^  if  tiiis  rig^t 
la  given  to  ikem  by  statute.^  Another  purpose  is  to  fix  the 
venue  of  actions  brought  against  a  corporation  where  the  law 
requires  that  suits  shall  be  brought  in  the  county  where  the 
defendant  resides.  In  those  States  which  have  statutes  exinressly 
aothorisiiig  a  corporatieii  to  transact  all  of  its  bnsinesa  o«t* 
aide  of  the  deoudliary  State,  this  pfoviaicii  for  a  donieiliary 
fMee  is  of  the  ntmost  importance. 

A  corporation  cannot  have  two  domiciles  at  the  same  time.* 
The  domicile,  residence,  and  citizenship  of  a  corporation  are  in 
the  State  fnnn  which  the  diarter  was  jnoeiired.*  The  place  of 
residence  is  In  the  eoontj  where  tiie  principal  office  la  located.^ 

The  principal  office  of  a  corporation  and  the  place  for  the 
transaction  of  its  business  are  not  one  and  the  same  thing.  A 
corporation  may  have  its  office  in  one  locaUiiy  and  transact  its 
bnainess  in  anothfir  * 

1  See  also  State  ez  rel.  v.  Company,  45  *  Erase  v.  Dmenboiy,  19  Wk,  Dig. 

Wis.  579;  Stickle  o.  Libertj  Cycle  Co.  (N.Y.)201. 

(H.  J.),     Ad.  706.  «  State  v.  Bj.  Co..  45  Wis.  580. 

s  SmK.*  8.  S.  Co.  ».riople,  147  BL  •  Bridge  Co.  v.  Wbollej,  78  Ky.  5S9. 

S34;  S5  K.  E.  608;  State  v.  Company,  24  «  American,  etc.  Co.  v.  JobnitoB,  M 

Texas,  80 ;  State  v.  Company,  45  Wis.  Fed.  503 ;  Chafee  v.  Bank,  71  Me.  514. 

579;  Simmons  v.  Company,  113  N.  C.  ^  McSheny  v.  CoMfiMy*  $7  GeL697; 

147  ;  18  S.  £.  117 ;  22  L.  B.  A.  677 ;  State  32  Fac.  711. 

9.  Company,  58  Minn.  8S0;  59  N.  W.  •  Van  Etten  v.  Eaton,  19  Mich.  187; 

10«S;  Stale  v.  Company,  59  Kaa.  151 ;  XamieCt  v.  Company,  68  N.  H.  48S ;  89 

5iPM.412;  Montgomeqr  t^lMei^  M  AtL  586 ;  Mendith  v.  Compn^,  59  H.  J. 

IfMikait;  l9ir.X.a«i.  Eg.  257 ;  44  Ati §§; Btmh9. WMHgm, 

S9C8L1S4. 


CHAP.  I.] 


DRAFTING  THE  CHARTER. 


§66 


§  65.  Board  of  Management.  —  A  corporation  without  a  re- 
sponsible management  is  like  a  boat  without  oars,  a  ship  with- 
out saila.  It  moat  hare  certain  ree<^iaed  and  dulj  i^[>pointed 
agents  to  represent  Hie  stockholders  in  the  managsmeiit  ol  the 
company.  These  agents  are  generally  known  as  a  board  of 
directors,  or  less  commonly  as  a  board  of  trustees.  Twenty  of 
the  States,  require  the  names  of  the  first  board  of  directors  to 
be  inserted  in  the  eertifieate  ineorpmtion,  while  of  the  re- 
mainder nine  reqnire  merely  the  nnraber  <^  direetim  to  he 
stated  therein.  Twenty-two  of  the  States  preseribe  residen- 
tial requirements  for  directors,  while  others  require  that  all 
directors  shall  be  stockholders.  The  number  of  directors 
required  by  the  Tarioos  business  ecnrporation  acts  vary  from 
an  unlimited  maximum  to  a  mii^miim  of  one.^ 

Where  the  statute  requires  the  number  of  directors  to  he  set 
forth  in  the  articles,  the  incorporators  cannot  name  a  number 
less  than  the  minimum  required  by  law.^  The  power  to  have 
and  elect  directors  is  inherent  in  every  corporation,  irrespec- 
tive df  statatSL  In  faet,  it  is  an  essential  featoze  ol  eorporste 
existence.* 

In  the  absence  of  express  provision  in  the  charter  or  by-laws 
the  management  of  the  business  of  the  corporation  is  vested  in 
the  Board  of  Directors  and  not  in  the  stockholders.^  Failure 
to  p^^M  dire^m  in  the  artioles  when  the  same  is  required 
by  statute  will  justify  State  officials  in  refunng  to  ifo  arti» 
cles.^  Merely  providing  for  executive  officers  in  the  artioles 
is  insufficient.^  The  original  directors  named  in  the  certifi- 
cate of  incorporation  under  direction  of  the  incorporation  act 
are  directors  clothed  with  all  the  powm  of  the 

corporation,  and  may  exercise  the  s«ne  powers  as 
elected  by  the  stockholders.^ 

§  56.  Capital  stock.  —  Capital  stock  is  the  fund  of  money  or 
other  property  fixed  as  the  basis  for  conducting  the  business  of 
the  ecnrpoi«lioii^  and  ciMitribi^  H  jBMtiwiwritafa  tq  ths  mih 

1  See  Part  HI.  Table  14,  page  584.  »  fiakwright ».  Company,  13  Ind.  404; 

a  /nre  GermasiajEISIif80MUMi|ilS|i*«BB.  In  re  Association,  19  Penn.  Co.  Ct.  Itop> 

Co.  Ct.  Rep.  89.  25 »  People  ».  Selfredge,  52  Cal.  331. 

»  Terwilliger  v.  Company,  59  111.  249 ;  •  Batei  v.  WUbod,  14  CoL  140;  24 

Heed  v.  Company,  50 Ind.  343 ;  Harlbat  v.  Vwa.  M. 

IfaahaU,  6211^  MO;  SSN.W.8IS.  '  BaaSlMi  TnMt  Oob  v.ClMMMk  liS 

«  DMav.BMlk,5W.a&(Pa.)i«l  S.T.48SS  S7  V.B.S14. 

67 


§  56  IMCOSPOftATIOll  AHD  (»0AKa4TI0N  OF  CX>BFOBAfI01».  [PAfiT  L 


tal,  and  is  usually  lefHreseiited  by  shares  issued  to  subscribers 
to  the  stock  on  the  initiation  of  the  enterprise.^  Capital  stock 

from  another  aspect  is  the  security  for  creditors  of  the  corpora- 
tions, and  entitles  the  owners  thereof  to  participate  in  the  man- 
agement of  corporate  business  and  share  in  its  profits  and  in  its 
surplus  after  payai^tof  ccnrpc^rate  debts.'  Shares  of  stock,  on 
^ke  other  haiid,  are  simply  the  muniments  and  eyidence  of  the 
holder's  title  to  a  given  share  in  the  property  and  franchises  of 
the  corporation  in  which  he  is  a  member.  ^  Frequently  the  words 
^capital"  and  capital  stock"  are  used  interchangeably  to 
express  the  proporfy  and  assets  of  the  cmrporation. 

It  is  not  altogelher  dear  whether  express  authority  to  issue 
shares  oi  capital  stock  is  necessary,  yet  it  has  been  repeatedly 
held  that  in  order  to  increase  or  reduce  the  capital  stock  of 
a  corporation,  legislative  authority  is  necessary.  The  prevail- 
ing Tiew  seems  to  be  in  fa?or  of  the  neeessilj  of  leg^lative 

absence  of  statutory      charter  requirements  neither 

•ubscription  for  capital  stock  nor  payment  thereof  is  necessary 
to  corporate  existence.*^  If  the  charter  of  a  corporation  does  not 
fix  tlie  amount  of  its  capital  stock ,  it  must  be  fixed  by  the  stock- 
lioldersy  or,  with  their  consent,  by  the  directors.*  Stodc  can  be 
issned  only  by  direction  of  the  corporation.' 

In  many  of  the  Commonwealths  the  minimum  amount  of 
capital  stock  which  a  corporation  may  have  is  fixed  by  statute. 
Very  few  of  the  States  limit  the  maximum  amount  of  capitaliza- 
tiiHEL*  To  determine  the  amount  6f  capital  stock  that  a  corpora- 
tion has,  preferred  slaek  mnst  always  be  included  herein.'  It 
is  ndl  always  anr  easy  questiim  to  determine  who  are  and  who 

1  ChriateMHl 9.  Xbo^  106  liL  T.  97 ;  12  Companj,  74  Texas,  421 ; .8  8.  W.  101 ; 

N.  E.  648.  Stowe  v.  Flagg,  72  111.  397. 

*  Janney  o.  Bank,  98  Ala.  515 ;  13  So.  <^  So.  K.  Rj.  Co.  v.  Cashing,  45  Me. 
701.  5Si;  Sfiifte'v.  Bank,  95  Tenn.  221;  31 

s  ifeehaaici^  Buk  n,  Conpanj,  IS  S.W.M8. 

lf.  T.  599.  ^  H.  D.  P.  AM*n  V.  Stevens,  34  Nelk. 

*  Cooke  V.  Marshall,  191  Pa.  St.  315;  528;  52  N.  W.  568;  Hendrix  r.  Academy 
43  Atl.  314;  196  Pa.  St.  200  ;  46  Atl.  of  Music,  73  Ga.  437;  State  t?.  Company, 
447  ;  Detroit  Chamber  of  Commerce  41  Ind.  151 ;  Williams  v.  Hewitt,  47  Ia. 
V.  Gardner,  109  Mich.  691^  67       W.  Ann.  1076 ;  17  So.  496. 

807.  •  See  Ftetm.  Table  5,  page  675.  See 

*  MdObAjp,  CenqMnqr,  155  XImi.  1^ ;  also  Hngbes  v.  Cominiiy,  84  Md.  816. 
10  B.  S.  SIO;  MhMS  |bk  BmUl  «.      •  9Md  e;  C«ifiiy,  10  a  C.  584. 

68 


CHAP.  L] 


DBAFTING  THE  CHARTER. 


§67 


are  not  stockholders.    The  question  must  usually  be  determined 
hj  the  partitmlar  facts  of  each  case.^ 

Sometimes  the  incorporation  act  requires  the  articles  to  state 
the  time  when  and  the  manner  in  whidb  stoek  shaU  be  p^d  for. 
It  is  sufficient  in  this  connection  to  say,  for  example,  that  the 
stock  shall  be  paid  for  in  cash,  and  that  no  certificate  of  stock 
shall  issoe  nutil  such  payment  is  made.  2  The  statement  may 
be  broadened  if  desired  by  setting  forth  in  the  articles  that  the 
stock  shall  be  paid  for  in  property,  at  swA  times  and  of  such 
a  character  and  with  such  notice  to  the  subscribers  as  the 
directors  shall  deem  for  the  best  interests  of  the  corporation.' 

Where  the  statute  requires  the  amount  of  the  capital  stock  to 
be  stated,  it  has  be^  held  sufficient  to  simply  state  the  number 
of  shares  and  the  par  value  of  the  same.^ 

§  57.   Limitations  upon  Amount  of  Ciqpital  BtCKdiB.  —  As  haS 

already  been  observed,  the  great  majority  of  the  incorpora- 
tion acts  provide  that  the  amount  of  capital  stock  which  the 
cqrporati(m  is  to  have  fiAaXl  be  fixed  in  the  articles  of  incor- 
poration. This  is  the  usual  and  often  the  only  limitation  on 
the  amount  of  capital  stock  which  any  particular  owprntimi 
is  authorized  to  have.  However,  in  fourteen  of  the  Common- 
wealths  the  minimum  capital  stock  of  all  corporations  is  fixed 
by  statute,  while  in  three  of  them  the  maximum  capitalization 
is  also  prescribed.* 

In  this  connection  the  words  of  the  court  in  Barry  9^  Ifer- 
chants  Exchange  Co.^  are  peculiarly  instructive.  In  that  case 
Chancellor  Sanford  observed :  "  That  the  capital  stock  of  a 
corporati<m  is  the  aggregate  amount  of  the  funds  of  the  cor- 
porators whidi  are  combined  together  undw  a  charter,  for  the 
attainment  of  some  common  object  of  public  convenienoe  or 
private  utility.  This  amount  is  fixed  in  the  act  of  incorpora- 
tion. It  is  thus  limited,  in  reference  to  the  convenience  of  the 
intended  corporators,  and  for  the  information  and  security  of 
l&e  public  at  lai^  To  tl^  corporators  it  prescribes  the  amount 
and  the  subdivisions  6f  their  respeclive  contribuiaons  to  the  com- 

1  See  0*Bnai  9.  FoIkecMo,  75  MiclL  •  Buffalo^  etc.  By.  Ca  9.  Hatch,  30 

554  ;  42  N.  W.  979.  N.  Y.  157. 

2  N.  O.  Ry.  Co.  V,  Frank,  39  La.  Ann.  «  See  Part  IIL  Table  5,  page  575. 
707;  2  So.  310.  •  1  San.  Chan.  (N.  Y.)  280. 

8  See  Baltimore,  etc.  Telephone  Co.  v. 
Company,  37  La.  Abb.  88S. 


§  59  iHcoapo&AiioN  AHo  aaQAsazATixm  or  oimimmm  [pam  t 

mon  fund;  tbe  Toioo  which-eadi  iluai  htm  in  ^  control  and 
vM^g^mi^y  andv  tbe  appoiiaonment  of  Hie  profits  of  the  enter- 
prise.  To  the  commnnity  it  announces  the  extent  of  the  means 
contributed  and  forming  the  basis  of  the  dealings  of  the  corpo- 
rate body,  and  enables  every  man  to  judge  of  its  ability  to  meet 
i  ts  engagements  and  peiionn  what  it  undertakes.  And  when  the 
statute  fet^im  the  stodc  to  he  paid  in  hefore  the  corporation 
can  transact  husiness,  security  to  those  ccmtracting  with  it  is 
thereby  superadded  to  the  information  of  its  resources.  These 
objects  for  the  public  benefit  are  such  as  the  legislature  had  in 
view  in  limiting  the  amount  of  capital  stock,  and  requiring  a 
specified  sum  or  proprartibn  to  he  paid  in.  ^e  otiMfr  considera- 
tion dictates  the  amoont  thos  fixed.  This  is  the  probable  and 
reasonable  extent  of  the  means  requisite  to  the  accomplishment 
of  the  end  proposed,  qualified  in  many  cases  by  the  unwilling- 
ness of  the  legislature  to  create  these  artificial  b^ngs  with  an 
nndue  amount  ol  capitaL" 

§  0&  Wataw  of  Omina  8«oo1l  — In  thirty-six  of  the 
States  the  par  value  of  the  shares  of  the  capital  stock  may 
be  any  amount.  In  the  remainder  the  par  value  is  limited 
by  statute.!  Where  the  corporation  act  does  not  require  that 
the  number  and  par  value  of  shares  be  set  farth,  the  presnmpti<m 
is  that  the  l^latore  intraded  that  this  lAiould  he  fixed  by  the 
stockholders  of  tiie  corporation  at  the  organization  meeting.^ 
The  matter  may  be  entrusted  by  the  stockholders  to  the  directors 
if  desired.* 

The  question  sometimes  arises  as«to  whether  changing  the  par 
value  of  shares  withoat  increasing  or  decreasing  the  capital 
stock  eonstitates  soeh  a  ** variation'*  therein  as  to  come  within 
Hie  statutory  prohibition  forbidding  such  variation  without  leg- 
islative authority.  The  prevailing  rule  seems  to  be  that  such 
variation  may  be  made  only  by  conforming  to  the  statute  (if  any 
exists)  aoth4Nr4sing.a9ieiidni^ts  to  the  charter  in  Hiis  regard.* 

§  59.  iUMwrt  of  tttodk  MbMsipilo^^  Unless  made  so  by 
statute;  no  subscription,  in  whole  or  in  part,  of  the  capital  stock 
of  a  corporation  is  necessary,  either  to  the  validity  ol  a  corpora- 

1  See  Part  IIL  Table  6,  page  576.  «  Commonwealth  v,  Conmaiij  53  Pa. 

S  8.  a  K.  B.  Co.  V.  Citfhing,  45  Me.  St  506.  * 

HUi  Smm  9.  Jkmk,  M  Tmm.  SSl;  81  *  C.  C.  %.  Co.     Aflerton.  18  WalL 

a  W.  m.  SS8;  SdfBOBvet  9. Gunpany,  U  FecLSSS. 

TO 


l]  dbafting  the  chaeteb.  {  69 

tim's  ezist^ce  (»r  to  its  right  to  transact  business.  ^  The  rule, 
kowever,  that  exists  in  this  country  to^y  is  doubtless  opposed 
to  the  common  law  rule  on  the  subject*  The  States  of  Wash- 
ington, Illinois,  and  Missouri  require  subscriptions  to  the  full 
amount  of  the  authorized  capital  stock.* 

Fourteen  of  the  Commonwealths  require  the  amount  of  stock 
subscribed  for  by  each  incorporator  to  be  set  for*  in  the  arti- 
cles, while  others  require  ih»  amount  of  stock  wilii  which  the 
corporation  will  commence  business  to  be  stated.  A  few  jwe- 
scribe  that  the  amount  of  stock  actually  subscribed  shall  be  set- 
forth.^  Sometimes  provisions  are  found  requiring  the  residences 
of  subscribers  to  the  capital  stock  to  appear  in  the  articles.^ 

Any  person  capable  of  contracting  may  sidMcribe  for  stodc  or 
become  a  stockholder.  This  includes  aliens,  married  women, 
and  corporations. «  Subscriptions  for  stock  must  be  made 
through  commissioners  where  the  law  so  provides. ^  But  even 
where  such  snbscriptiims  are  made  through  parties  other  than 
commissioners  wmtrary  to  fte  statirte,  such  subscriptions  nay 
be  afterwards  ratified  by  the  proper  party.  ^ 

Occasionally  attempts  are  made  to  limit  by  charter  provisions 
the  amount  of  stock  which  may  be  owned  by  any  one  stockholder. 
Such  proTisi<ms  are  generally  held  void,  as  not  called  for  by  the 
governing  statute.*  An  important  questi(m  that  arises  in  con- 
nection with  the  general  subject  of  stock  subscriptions,  amonnt 
of  stock  paid  in,  and  amount  of  capital  with  which  the  corpora- 
tion may  begin  business,  has  reference  to  the  effects  which  follow 
a  failure  im  the  part  of  the  corporation  to  comply  with  such 
statutory  requiremaits.  In  general,  it  may  be  said  that  the 
penalties  which  follow  a  failure  to  comply  with  such  provisioiis 
are  generally  along  the  following  lines : 

First,  they  afford  a  basis  for  an  action  to  be  brought  by  the  State 

1  Lb«My  V.   Company,  5  Neb.  50;  Cal.  201  ;  L.  O.  A.  ^jr.  Co.  v.lfaMii,  l< 

Johnson  v.  Kessler,  76  la.  411 ;  41  N.  W.  N.  Y.  451. 

67;  S.  F.  N.  Bank  v.  Alray,  117  Mass.  ^  See  Stemmeli  v.  Company,  67  Ind. 

476  ;  Minor  v.  Bank,  1  Peters  (U.  S.),  46  ;  457.                       ^       «,      x  «  • 

7  L.  E.  47;  Schenectady,  etc.  Plank  Road  •  DobKii,elc  By.  Go. «.  HM, Lb  B.S 

Co. ».  Thatdier,  111  H.  Y.  101.  Bawsh.  181;  Cork,  etc.  Ry.  Co.  v.  Ovt- 

«  BMm  9,  Compwy,  87        411 ;  6  "ove,  L.  R.  10  Ad.  &  EL  935. 

^  1  Shurtz  V.  Company,  9  Mich.  269. 

»  Denny  Hotel  Ca  v.  Schanw  6  Wa»h.  »  Walker  ».  Company,  34  Miac  (N.  Y.) 

134 ;  32  Pac.  1002.  245.                  «       .  . 

*  See  Buffalo,  etc.  Ry.  Co.  i;.  Hatch,  •  0»Bii»a  r.  Ciunmiiigi,  IS  lio.  Ap. 

SO  N.  Y.  157 ;  People  v.  Cliaaib6K%  4S  IVI, 

11 


§  60  INCOaPOJUHOli  AMB  OBOANIZAHON  of  C0SP(»UTl01i&  [PABI  u 


looking  to  the  forfeiture  of  the  charter.  Secondly,  they  some- 
timee  resnlt  in  rendering  the  inoorparators  liahle  at  co^artnerB, 
Hie  GOurtB  holding  that  hj  failing  to  comply  with  liie  statate 

they  have  forfeited  their  right  to  immunity  from  individual 
liability  for  what  would  otherwise  be  distinctively  corporate 
debts.  Thirdly,  in  some  jurisdictions  a  penalty  is  prescribed 
hf  alalnte  making  direelon  and  offiowa  liable  for  all  debta  con- 
tracted before  the  atatntory  requirements  above  referred  to  have 
been  complied  with. 

It  goes  without  saying  that  corporations  cannot  legally  issue 
stock  in  excess  of  their  authorized  capitalization.^  However, 
this  does  not  mean  that  bona  JUU  pnrehasers  of  anch  sharea  are 
wilboiil  remedy,  for  ordinarily  in  aoch  eaaea  both  the  corpcna- 
tion  and  its  officers  are  liable.* 

§  60.  Amo\mt  of  Stock  paid  in.  —  It  has  already  been  ob- 
served that  neither  the  subscription  to  nor  the  payment  of  the 
whole  amoont  of  ci^intal  stock  authorized  by  the  charter  is  a 
oonditien  precedent  to  the  legtA  existence  of  the  corporation 
unless  it  is  made  so  by  a  governing  statote.  Ordinarily,  it 
merely  goes  to  the  right  to  transact  business,  without  subjecting 
the  directors  or  the  corporate  officers  and  agents  to  personal 
liability.^  However,  in  some  few  of  the  States  the  corporation 
acta  provide  that  before  Uie  corporaticm  may  commence  bosi-  ; 
ness  a  certain  percentage  of  the  capital  stock  shall  be  paid  in.^ 
Where  the  articles  fail  to  so  set  forth  the  amount  of  stock  paid 
in  as  required  by  statutes,  this  does  not  afEect  ipso  facto  the 
legality  of  the  corporation's  existence,  but  it  is  a  matter  which 
can  only  be  taken  advantage  of  bj  the  Stote  in  warrmUa 
proceedings.* 

Statutory  payments  must  be  made  in  the  manner  and  time 
provided  by  statute,  and  they  must  be  paid  in  in  good  iaith.® 

^Mechanics'  Bank  v.  Company,  13  Music,  73  Ga.  437 ;  K.  C.  H.  Co.  v.  Hunt,  57 

N.  T.  599;  SooTiU  «.  Thlffl^  105  U.  S.  Mo.  126;  Tradesmen  Pablishing  Co.  v. 

143.  Company,  95  Tenn.  634  ;  32  S.  W.  1097 ; 

2  N.  Y.  N.  H.  R.  Co.  V.  Schuyler,  34  Ag.  Bank  v.  Burr,  24  Me.  256;  Y.  R. 

N.  Y.  30 ;  Mooies  v.  Bank,  111  U.  S.  156 ;  L.  N.  Co.  v.  Company,  72  Fed.  62. 

4  &  Ct  845.  *  MeLnea  v.  BHuungtcni,  1  Paige 

*  B.  8.,  ete.  Ca  V.  Attoamey-GeneEa],  (H.  Y.),  102 ;  People  v.  Chambers,  42  CaL 
21  Can.  Sup.  Ct.  72;  &  P.  S.  Ooh  v.  201 ;  State  v.  Company,  3  Hump.  (Tenn.) 
Thatcher,  11  N.  Y.  102.  305 ;  People  v.  City  Bank,  7  Col.  226 ;  3 

*  See  Part  III.  Table  6,  page  576.  Pac.  214  ;  People  v.  Bank,  129  111.  618 ;  22 

*  £.  P.  R.  Co.  V.  Vaaghan,  14  N.  Y.  N.  £.  288 ;  Hammond  v.  Strauss,  53  Md.  1. 
546.    See  alio  Hendiiz  v.  Aeideiiij  of 

72 


Failure  to  state,  in  the  affidavit  relatiye  to  the  mainrt  «l  rt^ 
paid  in,  that  such  payments  had  been  made  in  good  faiA  to  the 
Sreetom  U  not  fatal,  aa  the  bomJide»  of  the  transaction  will  be 

impliedJ'  .  . 

8  61.  Amount  •(  Btoek  wtth  widoh  •  Ootporatton  Mjr  begm 
B».ine.s.  -  Some  few  of  the  States  require  that  the  amount  of 
capital  with  which  a  corporation  will  begin  busineea  ahall  be 
Kt  forth  in  the  articles.  In  some  cases,  as  in  New  Jersey  and 
New  York,  the  minimum  amount  is  prescribed  by  statute,  ihe 
failure,  however,  to  actually  pay  in  the  prescribed  amount  of 
capital  stated  in  the  artielea  will  not  operate  to  dertroy  the 

corporate  existence.* 

S  62.  DwatUm  of  Corporate  Bxtetence.  —  At  one  time  there 
WM  a  tendency  on  the  part  of  the  States  to  limit  the  duration  of 
corporate  existence  of  eorporations  to  a  definite  period  in  the 
supposed  interest  of  the  public*  At  tiie  pre«mt  tome  in 
twenty-six  of  the  Commonwealths  perpetual  ohartrn  may  be 
procured  under  the  business  corporation  acts  in  force  therein. 
U  tiie  remaining  States  the  periods  vary  from  one  hundred 
years  to  twenty.*  Even  in  these  States  provUion  is  made  for 
extension  of  corporate  existence  by  emn^ying  with  the  atatuto 
in  such  case  made  and  provided.*  .  * 

The  phrase  "perpetual  succession"  has  been  held  not  to  be 
eqnivalent  to  perpetual  existence.'  The  naming  of  a  period  of 
corporate  exiatence  m  the  charter  in  excess  of  that 
law  will  not  render  the  charter  void,  bat  the  corporate  existence 
will  not  be  continued  beyond  the  statutory  period.^  ^ 

It  is  scarcely  necessary  to  say  that  the  continuance  of  active 
corporate  existence  during  the  entire  period  limited  by  the 
charter  is  aot  hiading  upon  the  corporation.^  A  difficult  ques- 
tion often  arises  when  the  oorporatioii  attempts  to  continue  its 
active  business  as  a  corporation  and  to  perform  its  corporate 

1  Buffalo,  etc.  Ry.  Co.  ».  HMch,  Sd      •  ^  P?'[''^' }^^' .  mo  ^iofi  • 

V  V  IM-  Fairchild  v.  Association,  71  Mo.  526  ; 

«  i^Ltoii  Copper  Mining  Co.    v.   State  e:c  rel.  Walker  v.  Piyrne.  129  Mo. 
Thurmond,  7  Mo.  Ap.  587 ;  Hammond  v.  468  ;  31  S.  W.  797. 

V  s^Hh  '  company.  58  N.  J.  Bq.  881 ,  81..   8..         BdW^  m.  Sf.  0^  >. 


§  M  mooBPOBAnoN  and  oeganization  of  .cobpobations.  [pabt  I. 

functions  after  the  expiration  of  its  charter.    Ordinarily  thig 
is  a  matter  which  concerns  the  State  alone.  ^   Usder  saoh  oii^ 
ciimstancea^  in  order  to  protoet  thircl  parties^  tiie  oodtIb  reoognize 
•ach  eoiporaticms  as  eorpmitioiis  de  facto  on  the  ground  that 
there  is  clearly  anthorily  for  their  attempting  to  act  as  cor- 
porations. ^    Many  courts  of  high  authority  have  held  that  a 
corporation  is  dissolved  and  ceases  to  exist  when  its  charter 
expires.^  In  many  States  there  are  statutes  permitting  coipo- 
rMom  to  exist  as  sneh  for  oerlain  purposes  after  the  expiration 
of  their  chnrt^.^  The  purpose  of  such  statutes  is  to  grant  to 
the  corporation  time  to  close  up  its  corporate  affairs.    It  has 
been  held  that  the  object  of  such  statutes  is  not  to  limit^"^ 
but  to  enlarge  corporate  privil^^es  so  that  the  ccnrpoiatiaii 
may  contimie  actiTC  biMnneas  throog^oat  the  idiole  charier 
period.* 

§  68.  Date  of  Annual  Meeting.  —  In  Alaska,  Arizona,  Dela- 
ware, Iowa,  Minnesota,  Nebraska,  and  Utah  the  corporation  acts 
require  that  the  date  of  the  annual  meeting  of  the  oorpmtifm 
be  inserted  in  the  articles.  Such  proTisions  aie  to  be  regarded 
as  directory  nikm  tim  mandatory,  and  their  legal  effect  is  es- 
saitially  the  same  as  if  snch  provision  was  merely  made  in  a 
valid  by-law  of  the  corporation.  In  Arkansas,  Louisiana,  and 
Tennessee  the  date  of  the  organization  meeting  must  appear  in 
the  certificate  of  incorporation.^  fiven  when  the  statute  requires 
that  the  directors  shall  be  ebosffiu  at  the  annual  meeting,  this 
has  no  reference  to  tiie  election  ot  the  first  board  at  the  organi- 
zation meeting.  7 

§  64.  Limitation  upon  Corporate  Indebtedneie.  —  In  the  absence 

of  constitutional  or  statutory  provision,  there  aie  no  limita- 
tions imposed  upon  corporaMons  witib  respeet  to  tiie  amount  of 
indebtedness  which  ^y  may  incur.*  The  whole  extent  of  cor- 
porate credit  is  measured  and  controlled  by  its  capital.  The 
laws  of  trade  have  placed  more  efficient  barriers  than  the  State 

»  BnBlinell  v.  Oomifaay,  138  UL  67 ;  S7       «  Berwick  v.  Company,  39  Mich.  701. 
^-  ^-  ^96-  *  Hughes  V.  Parker,  20  N.  H.  58 ; 

«  Miller  i;.  Company,  31  W.  Va.  836 ;  Beardsley  ».  Johosoo,  181  N.  Y.  884  *  8* 

S  8.  B.  toe.  N.  E.  380.  ' 

•  BndUnr  ».  Bcppell,  188  Ma  545;      f  K  A.  M.  Co.  v.  Moiing,  15  Gray 

32  S.  W.  645;8ti^pii«.y«BMil^9S  (MkMi  ),Sll.  ' 
N.  y.  384.  8  Barry  v.  CoMny,  1  StB.  C3m. 

«  See  Part  IIL  TaUe  17,  page  587.  (N.  Y.)  880^  310. 

74  • 


mUFXINO  THE  CSUkBTER. 


$66 


leffislataies  to  the  power  of  corporate  borrowing.  In  Alaska, 
Arisona,  Floridm  lows,  Miiiuesota,  and  Nebraska,  the  incor- 
poration acts  require  that  the  inaxiiinim  amount  of  indebtedness 
which  the  corporation  may  incur  shall  be  set  forth  m  the  aiiioles 

of  incorporation.  ,   , 

In  twenty-two  of  the  Commonwealths  statutes,  either  expressly 
or  by  impUcation,  prescribe  the  amount  of  indebtedness  which 

corporations  may  incur.*  .  ,  v ^  j 

When  the  phrase  "  implied  limitatioa  upon  ecwp<»«te  indebtech 
ness  "  is  used,  reference  is  had  to  that  not  uncommon  form  of 
limitation  where  directors  or  stockholders  are  made  liable  for 
COTporate  debts  in  case  the  corporate  indebtedness  exceeds  a 
certain  definite*  amount^ 

§  65.  Exemptioii  of  Stoottoldm  towi  Vmamtl  UMmw.  — 
While  there  is  no  common-law  liability  imposed  upon  stodc- 
holders  for  corporate  debts,  nevertheless  parties  may  lawfully 
contract  to  any  extent  they  see  fit  as  to  their  own  personal  lia- 
bility for  such  indebtedness.' 

In  order  that  stockholders  may  avoid  personal  liability  for 
corporate  debts  it  is  necessary  in  Ariwma,  Delaware,  Iowa, 
Kentucky,  Louisiana,  Mississippi,  Nebraska,  and  Utah,  to 
insert  provisions  in  the  certificates  of  incorporation  expressly 
exempting  stockholders  from  sudi  liability. 

of  the  States  and  Territories  the  ineorporatiim  acts  expreaslj 
provide  for  delegation  of  power  to  directors  to  make,  alter,  car 
repeal  by-laws.*  In  many  of  the  States  in  order  that  the  coi^ 
pmtion  may  have  this  power  it  is  necessary  to  insert  provision 
therefor  in  the  charts.*  Unless  the  power  to  make,  alter,  or 
repeal  by-laws  is  thus  delegated  to  the  board  <rf  directwra,  it  eaa 
only  be  exercised  by  the  stockholders.* 

»  See  P»rt  III,  Table  12.  page  582.       »  London,  rtc.  Bmk  '-^^^ 
See  also  Commonwealth  v.  Company.  129  Cal.  4T2 ;  58  fte.  J**:  ™ 

^^e  Trilmadge    Company,  4  Barb.  »  CahiU  v.  Company^ 

(N.  Y.)  382  i  AUiaon  ».  Company.  87  Tenn.  128 ;  Heintzelm«n».  A»<)cfato«^W««n. 

60-9  8  W.  226;  Sweney  ».  Talcott.  85  138 ;  36  M.  W.  180 ;  9mAvtBl^Vltmm 

Ia.'l03i  52N.W.108;  Gmttwr  9.C<mr  » Hiw)^ 58 M!m.  421.   

MLny.W&.44;aaaW.«8l.  •ikmmQm^Bmiv.Wyi^U 

76 


§  68  mOOSFORATION         OBOANIZAMON  OP  C0BP0BATI0N8.  [PABT 

§  67.   Provisions  for  the  Regulation  of  the  Internal  Affairs  of  the 
Corporation.  —  In  a  number  of  the  States  statutory  authority  is 
to  be  found  for  inserting  in  the  artieles  of  ineorporatton  any 
provigions  that  may  be  dedred  relative  to  the  regulation  of  the 
busmesa,  and  for  the  eondoet  of  the  affairs  of  the  corporation, 
creating,  defining,  and  limiting  the  powers  of  the  corporation, 
the  officers,  and  the  stockholders,  i    Under  such  authority  the 
clauses  which  are  usually  inserted  are  the  following:  giving  the 
directors  power  to  aell  all  the  hiiniieaa  of  the  corporation  as 
n  entirety;  the  power  to  aeU  Mitire  corporate  property  at  the 
lequeal  <rf  a  majority  of  the  stockholders ;  giving  the  right  to 
directors  to  make  and  alter  by-laws;  giving  the  power  to  direc- 
tors to  borrow  money  upon  bond  and  mort^  without  anthcmty 
therefor  being  firat  given  by  the  stoekholdefa ;  power  to  appoint 
^tional  Tioe-praideiiti  and  aaaiatant  aecretaries  and  treas- 
imn;  to  deelare  dividends;  to  reserve  and  fix  working  capital; 
to  appoint  an  executive  committee  from  the  board  of  directors; 
giving  stockholders  power  to  remove  directors;  giving  power 
to  create  a  lien  upon  stock  for  indebtedneaa  doe  company  from 
stockholder;  fHrovisiofi  for  the  mmination  of  books  by  the 
stoekhoUm,  and  in  connection  therewith  power  to  insert 
private  publicity  clause ;  to  provide  for  cumulative  voting  and 
limiting  the  power  to  vote;  reservation  of  power  to  diange 
provisions  in  the  articles  of  iiiootporatioa;  power  to  eraato 
preferred  stock. 

§  68.  Misogllnniia  WnfwUoam  Relathre  to  Contents  of  Articles 
of  liMMiipofaiioiL— .It  would  be  impossible  to  enumerate  all  the 
peculiar  provisions  under  the  several  business  corporation 
acts  which  exist  in  the  various  States,  Am<mg  those  not 
already  referred  to  are  the  following:  QMemni  ol  the  amount 
of  stock  SBbscribed  foip  by  the  incorporators;  a  list  of  all 

stock  as  preliminary  to 
incoiTM)ration.2  ^ 

In  setting  forth  the  subscribers  to  the  capital  stock  it  is 
sufficient  to  use  above  the  first  name        w«»ds  "names," 

1  See  Part  IIL  Table  10, page  580.       lia^^*  H  a  W. 

76 


IMAP.  l]  ^drafting  the  charter.  §  W 

residences,'*  "shares/'  and  then  immediately  follow  the 
same  with  the  names  of  the  subscribers  to  the  capital  stock. » 
Among  other  provisions  are  those  requiring  the  naming  of  an 
acrent  upon  whom  service  of  process  upon  the  corporation  may 
be  served; 2  another,  a  statement  of  the  manner  of  condwting 
the  business  of  the  corporation.'  A  number  of  Oie  StatM 
require  the  names  and  residences  of  the  incorporators  to  be 
set  forth  in  tiie  articles.*  Sometimes  it  is  necessary  to  secure 
the  approval  of  the  Attomey-Goieral  to  the  form  and  contents  of 

the  articles.^  u    vu     i  • 

§  69.  Construction  of  Charter.  —  Under  the  liberal  pronsiOBS 
of  the  modem  incorporation  acts,  the  articles  drawn  thereunder 
necessarily  assume,  by  the  sole  action  of  the  incorporators, 
numerous  powers,  many  of  which  have  been  heretofore  of  a 
public  character,  affecting  the  intoresto  of  the  public  very 
largely  and  very  seriously.    The  Supreme  Court  of  the  United 
States  has  taken  the  view  that,  for  the  reasons  just  given,  these 
articles  do  not  commend  themselves  to  the  judicial  mind  as  a 
class  of  instruments  requiring  or  justifying  any  very  liberal  con- 
struction.   That  court  has  said  in  this  connection,  that  where 
the  question  is  whether  they  conform  to  the  anflionty  giten 
statute  in  regard  to  corporate  organization,  it  is  always  to  be 
determined  upon  a  just  construction  of  the  power  granted  to 
them  with  a  doe  regard  for  all  other  laws  of  the  State  upon  that 

subject.*    , 

In  construing  charters  the  following  rules  seem  to  govern  the 
courts :  First,  the  intention  of  the  legislature  must  be  given  due 
weight^  Second,  due  consideration  must  be  given  to  the  policy 
of  the  Stote  with  reference  to  such  matters  as  evidenced  by  the 
character  of  legislation.  Third,  all  ambiguities  in  the  terms  of 
the  articles  of  incorporation  most  be  constoroed  against  the 
corporation  in  favor  of  the  public.^  Fourth,  words  should  bC 
given  their  ordinary  meaning.^   Fifth,  the  construction  given 

1  Vawtet  V,  Fianklin  CoOlie,  53  Ind.      •  Of.  Ry.  Co. ».  Or.  By.  Co.,  ISO  U.  & 
M  1 S  9  &  Ck.  409. 

t  Jolm^in  r-MiW  Lodge.  Sl  Ky.     7  Union  Itai.  B«k  W 

^^st!?e^"^;ol^^^^^  ^' f-r^T.  CO..  company.  157  HL 

s  See  Field  v.  Cooks,  16  La.  Ann.  iOa 
-153. 


§  69  nroaspoBATioN  and  organization  op  cobporations.  [part  l 

the  charter  must  always  be  reasonable. ^  Sixth,  where  the 
language  of  the  certificate  as  to  corporate  parpote*  and  powers 
permits  of  two  constructioiiai  ilyit  tlie  mm  lararable  to  the 
Stale  ia  to  be  adopted.* 

^  Black  V.  Companj,  22  N.  J.  Eq.  130 ;       «  BriOft  Co.  v.  Wmtw  Co^  If  COBt. 
Wheeler,  etc.  Co.  ».  Company,  14  Wash.  221. 
M;  4i  FlM.  316;  Nat  Ba&k  v.  Com- 
pngr,  41 0.  St.  1. 


1 


78 


CHAP,  n.]  nmmsm  TBM  cmMsm.  §  71 


CHAPTER  IL 
PROCUBINa  THE  OKASSBBSL 

§70.  Bigaing  the  Articles.  —  With  but  few  exceptions  the' 
busineM  oorporatioii  acts  of  the  various  Commonwealths  provide 
Hiat  the  articles  sliall  be  signed  by  the  incorporators.  ^  It  is  not 
requisite  to  the  validity  of  snch  artielea  that  they  be  aigned 
within  the  State  from  which  the  charter  is  procured.*  The  arti- 
eles  may  be  drawn  on  separate  sheets,  the  last  one  of  which  only 
need  be  signed  by  the  incorporators. »  If  the  incorporator  is 
nnable  to  write  he  may  sign  the  articles  by  his  mark,*  ThefuU 

name  need  not  be  signed.* 

If  seals  are  required  by  statute  they  must  be  nsed.*  Tfce  wm 
<rf  a  power  of  attorney  to  sign  articles  would  probably  not  be 
saneticmed  where  the  statute  calls  for  additional  matters  which 
are  necessarily  personal  in  their  natore.^ 

§  71.  Aoknowledgment  of  »— ottoo  of  AxtiOlaSv—  With  SOUia 
few  exceptions,  the  incorporation  acts  of  all  the  States  require 
that  the  articles  of  incorporation  shall  be  acknowledged  by  the 
incorporators,  before  some  officer  authorized  by  law  to  take 
acknowledgments  of  deeds-  There  must  in  all  cases  be  a  proper 
number  of  acknowledgments.*  Wheis  the  statutes  designate 
some  particular  officer  to  take  the  acknowledgment,  ihs  eharfeer 
is  voidable  if  taken  before  any  other  official.^  A  failure,  on  the 
part  ol  the  ofltoer  taking  the  acknowledgment,  to  certify  that  the 

1  state  V,  Critchett,  37  Minn.  13 ;  32  No.  5816;  Wumu  ».  OSkmOm,  SSa  St. 

N.  W.  787;  People  v.  Company.  97  Cd.   liC.  .  .   ^ 

276  -  32  Fte.  286;  Hughes  ».  Oompuiy,  ^  In  re  Charter  AcfeMWltllgnMiifi  »» 

84Md.3l6;  W.B.  A  L.A^  P*.  Co.  Ct.  Rep.  187.       ^  _  .  _ 

maTso  Pa.  St.  428.  »  People     Company.  97  M.  ^6 ;  82 

a  Hnmphreys  v.  Mooney,  5  Col.  282.  Psc.  236 ;  Hughw  v.  Company.  84  Md. 

»  See  L.  O.  A.  &  N.  By.  Co.  v,  Mawn.  316 ;  Doyle  v.  ^Mimej,  42  U*.  M ,  1 

16N.Y.451.  y.  W.  268}  &isa».  jtopfc,  *•  ^  lOijS 

•  Trustee,  etc  v.  Camphell,  4S  U.  Aaa.  »  W.  772 ;  State  «.  CiMiUti  SI  WM. 
isaa*  91  So.  124.  13 ;  32  N.  W.  787. 

•  Stete BedL  SI  W.  100.  »  Shields  v.  Company,  94  Tenn.  123, 

•  -  >.  nMiisMT   Fed.  firm.   28  S.  W.  668 ;  State  v.  Lee,  21  O.  St.  662 ; 
U^M       x,vmvmmj,  .    g^^^^^  ^  ^^,1,0^4^0^^  35  Q.  St.  483^ 

70 


§72  nfOOBPOBATTON  AND  OBGAmZATWMI  OF  COBPOBATIONS.  [PABTI. 


incorporatore  were  personally  known  to  him  will  not  inyalidate 
the  incorporation  proceedings.^ 

Even  where  the  statutes  require  the  orgaDiiati^m  meetiiigB  to 
be  held  within  the  domioiliary  State,  it  is  not  neeemry  that  the 
articlea  be  signed  and  acknowledged  therein.  > 

The  omission  of  immaterial  parts  of  the  acknowledgment  does 
not  operate  to  render  the  incorporators  liable  as  partners.*  In 
order  to  entitle  articles  to  be  filed  with  the  proper  State  official, 
they  must  be  u^ied  and  aeknowledged  in  aU  respects  as  reqniied 
bylaw.* 

f  T2.  MttMlioB  of  Arttoles.  —  In  ten  of  the  Commonwealths 
the  law  requires  that  either  the  petition  for  a  charter  or  the 
charter  itself  or  the  substance  thereof  shall  be  pablished  for  a 
prescribed  length  of  time-*  The  original  tlieMy  upon  which  such' 
reqnirementi  are  based  ai^wars  to  have  be^  «at  the  creation 
of  a  corporation  slioald  be  attended  with  all  possible  publicity, 
in  order  that  all  the  world  might  acquaint  itself  with  the  fact 
that  it  is  dealing  with  a  corporation  and  not  with  a  natnral  per- 
son.«  At  the  present  time  the  l^alnres  seem  to  proceed  on 
the  basis  of  inmishii^p  the  newspapers  wi^  additional  paid 
BMtter  on  ite  tiMmy  that  they  need  it  in  their  business. 
Howem  tiiat  may  be,  it  still  remains  true  that  the  statutes 
governing  publication  of  articles  must  be  substantially  com- 
plied with,  otherwise  the  charter  may  ba  declaml  roid  at  the 
instance  of  the  State.' 

Scmietimes  doe  pablica^cn  of  articles  carries  with  it  immu- 
nity  ircnn  personal  Halnlity.*  t 

It  has  been  held  that  the  publication  of  more  than  the  law 
requires  will  not  invalidate  the  l^^ty  of  the  poblicatioa* 

,  P           \                 ^  ^  B%Awr».  Giegory,  73  DL  197;  Field  v. 

3Pac.716.   See  al*,  Borton  Acid  11%.  CofO^  1$  1m.  jJiu  W ;  Bmi  w.' bJL 

Co.  r  Monng,  15  Gray  (Mass.),  21 1.  Imry,  55  Mo.  810;  Indiaiuipdlii  IftTS! 

«  Humphreys  t;  Mooiiey,  5  Col.  282.  v.  Herkimer,  46  Ind.  142;    Holmee  v. 

9                     ""^^  *®          ^  ^1          568;  Davenport  Nat. 

m«  1  ^'^^  ^-           ^            ;  15  N.  W.  865. 

N  wJfiS  *;ir  T^'                   *  »  •  »»Tenport  Nat.  Bank  v.  Davi«,  43  la. 

Lr249  U^'T^^  "          ^  Clark 

^  si  kit  TTT  T^i  .  ^'^^^^"^  "  Ky.  L«r  Bep.  614 ;  31 

.  ^  r                  ^'  ^  S.  W.  878 ;  Wing  r.  81at«.  U  B.  L  W; 

•See  In  re  Church,  etc.,  14  Phil.  121 ;  35  Atl.  302;  Heinig  r.  C^J^M  £ 

«Ji*«ii^Griinm,noia.  145;81N.W.  800  ;  5  Ky.  Law  Sep.  28L^'  • 

^'^^■PM^t  •!  la.  Wl ;  IS  (Pa.)  14a  - 

80 


OBAF.  n.] 


PBOGUBIMO  THE  CHARTER. 


iT6 


5  78,  Aftdavit  as   to  Stock   Subscription..  -  The   laWB  of 
Florida,  Georgia,  Illinois,  Kansas,  Michigan,  Missouri,  Ohio, 
Oregon^  tennsylTania,  Soath  Carolina,  Texas,  Utah,  Vermont, 
and  West  Virginia  require  in  addition  to  the  ordmary  ae- 
knowledgment  of  the  execution  of  the  articles,  that  tiie  same 
be  accompanied  by  an  affidavit  showing  that  the  amount  of  stock 
required  by  law  as  a  preliminary  to  doing  business  as  a  corpo- 
ration  has  been  duly  subscribed.^    The  same  matter  appears 
in  the  certificate  of  organization  required  in  Arkansas,  Con- 
necticut,  Indian  Territory,  Maine,  and  Virginia. 

On  the  other  hand,  the  incorporation  acts  of  Alabama,  V^U 
-  fomia.  Delaware,  Idaho,  Kentucky,  Nevada,  New  Jersey,  New 
York,  North  Carolina,  Ohio^  Virginia,  and  Washington  merely 
require  that  the  amount  of  stock  subscriptions  be  set  forth  in  the 

articles.  ,  _ 

As  to  the  content  of  the  affidavits  as  to  stock  subscriptions,  it 
is  sufficient  if  they  serve  to  show  clearly  that  the  statute  rela- 
tive to  the  same  has  been  substantially  complied  with.* 

Unless  the  statute  designates  some  officer  before  whom  such 
affidavit  be  sworn  to,  it  may  be  made  before  any  officer  authonied 
to  administer  oaths  and  to  certify  to  the  same.* 

§  74.  Anti-TruEt  Affidavit.  —  Some  few  of  the  States  —  such,  for 
'    example,  as  South  Dakota,  Missouri,  and  Illinois  -  require  either 
of  the  incorporators  before  organiaation  or  of  certain  designated 
officers  of  the  corporation  a^r  organization  lhat  they  certify 
and  make  oath  to  the  effect  that  the  corporation  is  organised  for 
the  transaction  of  a  lawful  business  and  not  for  the  purpose  <rf 
enabling  the  corporation  to  violate  the  provision  of  the  anti-trust 
act  in  force  in  that  particular  Comm<mwealth.    Just  what  prac- 
tical purpose  the  requirements  here  referred  to  serre,  it  would 
be  difficult  to  say.    In  its  practical  operation  it  is  usually  a  mere 
formality,  and  has,  so  far  as  observation  goes,  seldom  senred  any 
naeful  purpose.^  . 

§  75.  Speoial  HaqulfMitBti  to  PMrtlimte  States.  —  Owing  to 
the  varied  requirements  existing  in  the  seniral  States  and  Terri- 
tories relative  to  the  steps  necessary  to  procure  diartm  under 

1  People  tJ.  Company,  45  Cal.  306.  O.  St.  668  ;  32  N.  E.  933  ;  People  Com- 

»  K     Company,  45  Cal.  306;  B.    panv,  121  N.Y^  582;  ^4  KE_834;  St^ 

6  P.  Ry  Co.  V.  Hatch,  20  N.  Y.  157.  r.  Standard  Oil  C5o.,  49  O.  St  1ST  |  SO 
»  Wood  V.  Bank,  9  Cowen,  194.  N.  E.  979. 

4  See  Ohio  St.  By.  Co.  ».  Slrt^  4» 
.  6  ®^ 


§  76  nOOBMttAXION  ABD  OEGANIZATION  OF  COaPOSATIONS.  [tABt  h 


the  Iftws  thereof,  it  will  be  impossible  to  do  more  than  merely 
refer  to  a  few  of  these  requirements  not  already  disctmed. 
Under  the  statutes  of  some  of  the  States  it  is  necessary  before  a 
charter  can  issue  that  the  eaiutal  stock  either  be  subscribed  for 
m  whole  or  in  p.rt»  In  others  it  is  necessary  that  all  or  part  ' 
of  the  authorized  capital  stock  be  actually  paid  in.  2  However 
in  many  of  the  States  it  is  not  necessary  that  the  capital  stock  be 
subscribed  for  as  a  condition  precedent  to  corporate  existence.* 
Some  of  the  States  require  that  the  certiBcate  shall  show  the 
amount  of  the  capital  stock,  the  amount  actually  paid  in,  and 
that  It  shall  gif»  the  names  and  residences  of  the  shareholders, 
and  the  amount  of  stock  which  each  has  subscribed  Where 
such  provisions  exist  substantial  compliance  themridi  is  essen- 
tial to  the  creation  of  a  tUJur4  cotpmtioa.* 

Sometimes  iacoiporation  acts  require  that  the  certificate  shall 
state  the  mazimnm  amount  of  indebtedness  which  the  corpora- 
tion IS  authorized  to  incur.^  In  Indiana  the  articles  must  contain 
an  impression  or  description  of  the  seal.«  In  Georgia  charters 
are  issued  by  the  courts  npoo  petition  therefor.  Here  as  well  as 
in  other  cases  the  statote  governing  the  matter  must  be  substan- 
tially complied  wi^' 

tJ^LT^  ^^  '^'^  requires  that  the  certificate  shaU  set 
forth  the  name  and  location  of  the  principal  place  of  business  «f 
the  corporation    Such  provision  most  be  snbstaatially  complied 

incorporation  act  required  the 
mpphoahoii  for  a  charter  to  show  the  place  of  business  of  the 
proposed  corporation,  and  the  application  merely  stated  location 
of  Its  office,  It  was  held  insufficient.  Thia  for  the  reason  that  a 
corporation  maj  have  ita  office  in  one  place  and  its  place  of 
hoaineaa  in  aao^r.*  • 

§  76.  PoMfs  of  state  Offloials  Relative  to  Acceptmg  or  Rejeot- 
laa  Aftkte.  —  Where  the  sUtute  either  expresslj  or  by  unplica- 

w  W  •  ^  Vawter     Franklin  CoUeire.  53 

St  l'69^^*  Cmtipmy,  90        ^  88.  w 

«  People  Chambea, 42 CJ. Ml.  4  S.  E.  501 ,  /. nO^^^uotm  ' 
*^^T1-^        ,    n  'Montgomery  ..^".wSL 

»>ni^i'.L.G»id,8rAI».482;6Soa.332.   VaUey  Works,  17  Cal.  132. 

Q  4«Ti,  10  Pa.  88a 


CHAP,  n.]  wocuBmo  the  charter.  §  76 

tion  bestows  upon  State  officials  the  duty  of  examining  articles 
of  incorporation  and  passing  upon  their  legal  sufficiency  and 
authorizes  State  officials  to  certify  that  the  incorporators  hare 
become  a  corporation,  then  the  issue  of  such  certificate  becomes 
an  adjudication  that  the  corporation  has  been  duly  formed  until 
the  State  has  vacated  the  charter  by  proper  proceedinjjs  taken  in 
the  conrts.^  Usually  this  duty  is  bestowed  upon  the  State  depart- 
ment which  is  a  branch  of  the  executive,  and  cannot  tiiereforo 
pass  upon  questions  which  are  purely  judicial.*  It  is  confined  to 
an  examination  as  to  whether  the  purposes  of  the  proposed  cor- 
poration are  legal  on  their  face  and  whether  conditions  precedent 
have  been  complied  with  so  that  a  charter  should  properly  issue.* 

The  main  points  to  which  State  officials  shoidd  address  them- 
selves in  passing  upon  corporation  papers  presented  to  them  are 
as  follows:  (1)  Have  the  requisite  number  of  incorporators 
signed  the  articles  of  incorporation?  (2)  Have  the  articles 
been  properly  acknowledged  by  the  incorporators  ?  (3)  Is  the 
corporate  name  mentioned  in  the  articles  one  that  can  be  law- 
fully used  by  the  proposed  corporation  ?  (4)  Have  the  statu- 
tory requirements  relative  to  the  contents  of  the  articles  of 
incorporation  been  substantially  complied  with  ?  * 

Generally  speaking,  permission  to  file  charters  may  be  refused 
upon  the  following  grounds:  If  the  name  of  the  proposed 
corporation  is  identical  or  closely  resembles  that  erf  an  exii^ing 
corporation,  the  State  officials  may  exercise  their  discretion  and 
refuse  to  pass  the  charter. ^ 

It  has  been  held,  however,  by  a  court  of  excellent  authority 
that  a  statute  prohibiting  the  6orporation  from  assuming  a  name 
in  use  by  any  other  organization  or  so  closely  anal<^us  to  it  as  to 
mislead  the  public  is  designed  to  protect  domestic  corporations.* 

1  Boyce  y.  M.  E.  Church,  46  Md.  359 ;  Charter  St.  L.  Ass'n,  19  Ta.  County 
D.  H.  R.  R.  Co.  t'.  Marsh,  Fed.  Cas.  4014.  Ct.  Rep.  25 ;  In  re  DuQuesue  College 

2  Granby  Co.  v.  Richards,  95  Mo.  Chftrter,  12  Pa.  Connty  Ct.  Rep.  4tl ; 
106;  8  S.  W.  246;  Van  Pdt  v.Gatdner,  WoodbMiry  v.  McClnrg, 78 Miaa.  8Sl;  2» 
54  Nab.  701 ;  75  N.  W.  874.  Sou.  514. 

'  »  P.  R.  T.  Rd.  Co.  Charter  Appli-  5  state  r.  McGrath,92  Mo.  355 ;  5  S.  W. 

cation,  20  Pa.  County  Ct.  Rep.  151  ;  N.  29  ;  American  Clay  .Mfg.  Co.  v.  American 

M.  G.  T.  Co.  V.  N.  G.  T.  Co.,  21  Pa.  County  Clay  Mfg.  Co.,  198  Pa.  St.  189 ;  47  Atl. 

Ct.  Rep.  393  ;  People  v.  Company,  130  lli.  936 ;  People  v.  Payne,  161  N.  Y.  229  ;  55 

268  ;  22  N.  E.  798.  N.  B.  S49. 

*  State  ».  National  Inv.  Co.,  88  Wie.  •  People  v.  H.  L.  A.  Co.,  Ill  Mieh. 

512;   In  rt  Ap|>lieation  for  Charter,  5  405;  69N.  W.653. 
Bi.Dii.Bmw  948;  /a  n  Applicatinn  lov 

83 


§  78  INCOBPOttATlON  AND  OBGAMIZATIQII  OF  OOWMUIIOIIV.  [^Atl  I, 

Generally  speaking,  the  action  of  the  Secretarj  of  State  in 
issuing  a  license  or  certificate  of  iaeorporatioii  is  ministerial  i 
Neither  State  cfficials  nor  tiie  courts  can  with  respect  to  incor- 
^ration  add  new  conditions  to  those  prescribed  by  statute. » 
Generally,  the  test  of  the  extent  of  powers  of  ministerial  offices 
is  the  right  to  compel  performance  by  mandamus.' 

It  is  an  almost  universal  rule  that  after  tile  certificate  is  once 
issued,  the  officer  who  issues  it  has  no  power  to  revoke  the  cer- 
tifi^te.  For  thi&  purpose  application  must  ordinarily  be  made 
to  Hie  courts.* 

§  77.  Right  to  Mandamus  Btete  Offioials  lor  tviMag  to  file 
Article..  —  Ordinarily  mandamus  is  the  pn^r  remedy  where 
State  officials  refuse  to  file  a  eertifieate  of  incorporation,  pro- 
vided the  duty  of  reednng  and  filing  the  same  is  lodged  with 
them.* 

§  78.  Organization  Tax.  —  By  the  term  "  organization  tax,"  as 
here  used,  is  to  be  understood  the  amount  o£  money  exa<$ted  by  the 
State  from  individuals  in  letnm  for  a  grant  from  the  former  to 
the  latter  of  the  right  or  priyil^  of  heing  a  corporation ;  that  is, 
of  doing  business  in  a  corporate  capacity  and  under  the  privilege 
or  franchise  whicli  when  incorporated  the  company  may  exercise. 
The  right  or  privilege  to  be  a  corporation  or  to  do  business  as  such 
body  is  one  generally  deemed  of  value  to  the  corporation,  which  is 
the  right  or  privilege  by  whieh  several  individuals  may  unite  them- 
selves under  a  common  name  and  act  as  a  single  person  with  a 
succession  of  members  without  dissolution  or  suspension  of  busi- 
ness  and  with  a  limited  individual  liability.   The  grant  of  such  a 
right  or  privilege  rests  entirely  in  ih»  discretion  of  the  State,  and 
may  unquestidnablj  be  aee<mipanied  with  such  conditions  as  the 
l^^idatnre  ihsrwd  may  judge  most  befitting  to  its  interests  and 
policy. 

Thus  the  latter  may  require  of  the  incorporators,  as  a  condition 
to  the  original  grant  of  the  franchise  as  weU  as  of  its  continued 
exereise,  that  the  eorporayon  pay  a  speeific  sum  to  the  State. « 

«  ir^r^"-     ®'      ^       ^'       '       '  N-  Y.  P.  Co.  r.  Rice, 

rn  V^*      A  ^  ^'  ^'      28      E.  251 ;  H.  W.  I.  Co. 

8^'«  P      w   .  ,   o  417;  State      Taylor,  55  O.  St.  61.  44 

«  F.  B.  Co.  V.  Wood  14  Ga^ 80.  N.  E.  513 ;  State     McGrath,  92  Mo.  855  ; 

^  ^^m7S^o^  ^  I-  ^      ^'  29 ;  "linoi«  Watch  Case  Co.  v. 

JMU40I1L483;  .31  N.  E.  400;  In  re  N.  L   Pearson,  140  111.  423  ;  31  N  E  400 

K.  Ob,  149^  at.  450;  SI  Ati  $79,  •  Home  luBuraace  Co.  v.  People  ot  the 


CHAP.  U.] 


PROCUBINO  THE  CHARTER. 


§78 


There  are  two  broad  grounds  for  sustaining  the  power  of  the 
State  to  impose  organization  taxes.  The  first  of  these  is  their  in- 
herent power  to  regulate  corporations.  Corporate  capacity  itself 
is  a  franchise.  Ko  persons  can  make  themselTCS  a  bodj  corporate 
and  politic  without  legislative  authority.*  The  other  ground  re- 
ferred to  is  the  inherent  power  of  the  State  to  enact  such  legislation 
as  may  be  necessary  in  order  to  raise  revenue  for  State  purposes.  2 

The  term  "organisa^n  tax"  should  be  carefully  distinguished 
from  the  phrase  **  franchise  tax ; "  the  latter  referring  to  the  tax 
imposed  by  the  State  upon  corporations  for  the  privilege  of  doing 
business  in  a  corporate  capacity  after  incorporation.  All  of  the 
States  and  Territories  with  the  exception  of  Arizona,  Arkansas, 
Distriet  of  Columbia,  Georgia,  Indian  Territory,  Louisiana,  and 
Oklahoma,  impose  graduated  organization  taxmi  upon  corporations 
organized  under  their  laws.  Tliere  can  be  no  queston  as  to  the 
validity  of  such  graduated  taxation.^  The  same  is  true  even 
when  in  such  matters  the  legislature  distinguishes,  as  is  the  case 
in  West  Virginia  and  New  Hampshire,  between  resident  and  non- 
resident domestic  corporations.^ 

At  the  present  time  it  is  a  rule  of  almost  uniTersal  appUeatum 
that  the  payment  of  an  organization  tax  is  a  condition  preeedent 
to  corporate  existence.^  Organization  taxes  cannot  be  evaded  on 
the  ground  that  the  corporation  calls  itself  an  "eleemosynary" 
corporation  when  in  fact  it  is  otlierwise.^ 

The  State  is  not  bound  to  permit  corporations  to  consolidate  or 
to  extend  their  corporate  existence,  and  for  this  reason  it  may 
lawfully  impose  the  payment  of  an  organization  tax  as  a  condition 
precedent  to  consolidation  or  to  the  extension  of  its  corporate 
existence.^ 

State  of  New  York,  134  U.  8.  594 ;  10      *  B.  J.  C.  C.  Oa  ».  Mmat,  iS  W.  Va. 
8.  Ct.  593  ;  83  L.  B.  10S5;  Qoidoii  v,  633  ;  40S.B.5U. 
ApDMl  Tax  Court, 44  U.S.  (3  How.)  133 ;       »  Union  Horseshoe  Works  t'.  Lewis, 

11  Law  Ed.  529;  B.  &  O.  Uy.  Co.  y.  Mary-  1  Abb.  (U.  S  )  518;  Fed.  Cases,  No. 
land,  88  U.  S.  (21  Wall )  456;  22  L.  E.  14383  ;  Combined  Saw  &  Planer  Co.  v. 
678;  People  tf.Eose,  210  111.  582;  71N.E.  Flournoy,  88  Va  1029;  14  8.  B.  97%; 
5^0  Edwaidiv.D«&veraB.O.R.C<».,13  0oL 

1  CaKfomU  v.  Company,  IS7  U.  8. 1 ;  99;  tl  Pte.  1311;  Sirte  v.  Rotwitt,  17 
8  a  ct  l«73 ;  32  L.  B.  157.  Mont.  41 ;  41  Pac.  1004  ;  Ashley  v.  Ryan, 

2  Baker  n.  Cincinnati,  11  0.  St.  534;   49  O.  St.  504 ;  31  N.  E.  721;  H.  M.  Co. 
W.  U.  T.  Co.  V.  Attorney-General,  125  v.  Bremer,  12  R.  I.  491. 
U.  S.  530 ;  8  S.  Ct.  961 ;  31  L.  E.  790.  •  State  ».  Lesuenr,  99  Mo.  552 ;  IS 

«  See  Ashlev  r.  Rvan,  49  0.  St.  504;    S.  W.  237. 
31  N.  B.  721  ;'l63  U.  S.  436;  U  8.  Ct.      »  Ashley  v.  Ryan,  49  O.  St.  6M;  31 
865;  38L.B.773.  «•  ^}  1*  »•  Ct. 


§  80  INCOBPOBATION  JkXD  OBOAIIISATION  OF  OOBPOBAlK>mL  [PIBT  I. 


§  79.  JPofm  ill  wUMh  Ctefetr  te  gnuitsd. —  In  only  twentj^nine 
of  the  States  do  the  corporation  acts  expressly  proTide  for  the 
issuance  of  a  certificate  of  incorporation  or  charter  by  State 
officials.  In  some  few  of  the  remainder  the  power  to  issue  such 
instrumeuts  is  assumed  by  the  officers  having  the  matter  in  charge 
without  any  express  authorization  therefor  in  the  statute.  In  the 
remaining  States  proof  of  incorporation  is  usually  had  by  pro- 
cnring  certified  copies  of  the  articles  of  incorporation.  The  mat- 
ter becomes  one  of  practical  importance  in  connection  with  the 
right  of  third  parties  to  collaterally  attack  not  only  the  corporate 
existence  but  the*  corporate  purposes  and  powers  as  welL  This 
matter  has  already  been  dtsenssed  at  length  in  a  previous  section.^ 

Ordinarily  the  commencement  of  corporate  existence  dates 
from  the  time  when  the  certificate  of  incorporation  is  issued. 
Where  the  statute  expressly  provides  for  the  issuance  of  a  charter 
bj  State  officials  the  latter  have  no  discretion  in  the  matter,  and 
must  issue  the  same  upon  demand  of  the  parties  who  have  legally 
•entitied  themselves  to  the  same.^  The  certificate  must  be  issued 
immediately,  and  must  be  in  the  form,  if  any,  prescribed  by  the 
statute.^  The  Secretary  of  State  should  always  affix  his  seal  to 
the  certificate  of  incorporation.^ 

§  80.  raiag  aad  Saeordliic  in  X«oia  Coimt7  imom,  —  Generally 
speaking,  it  is  part  of  the  plan  adopted  by  the  various  legislatures 
in  the  enactment  of  general  incorporation  acts,  to  provide  in 
addition  to  requiring  that  articles  of  incorporation  be  filed  with 
some  designated  State  official,  that  they  always  be  filed  in  one 
or  more  local  county  offices.^  Usually  ^e  latter  requirement  is 
confined  to  the  provision  that  they  be  filed  in  the  county  where 
the  corporation's  domiciliary  office  is  located.  However,  in  some 
few  of  the  States  such  articles  must  be  filed  in  every  county 
wherein  the  corporation  transacts  "its  business  or  holds  real 
property.  In  some  of  the  States,  such  as  California  and  Maryland, 
more  Importance  appears  to  be  attached  to  the  filing  of  the  articles 
in  the  local  county  office  than  with  State  officials.^ 

865;  38  L.  E.  773;  People  r.  Pfister,  57  Ass'n  v.  Clarke,  61  Me.  351 ;  Sparks  v 

Cal.  532.  Company,  87  Ala.  294;  6  So.  195  ;  People 

1  See  ante,  §  6.       .  ».  Piiyn,  1«1  N.  Y.  229;  55  N.  E.  849. 

•  8fe«t«  P.  Tsfkir,  55  0.  St  61 ;  44  N.  S.      *  Benner  ».  State,  7  Lea  (Tenn.),  6SS. 
513 ;  Sparin  V,  Goapany,  87  AH.  SM ;  6       «  See  Part  III.  Table  4,  page  574. 
So  195.  8  SeeN.H.a4M.Ca».  Woodberrr. 

«  Stowe  V.  Flagg,  72  HL  397 ;  TL  F.  14  CaL  434. 

86 


CHAP,  n.] 


PBOCUBING  THE  CHARTER. 


§81 


The  purpose  of  filing  articles  in  county  offices  has  heen  said  to 
be  in  order  that  persons  dealing  with  the  corporation  may  have  an 
easy  and  publie  inspection  of  the  basis  of  its  corporate  organi- 
zation  1  With  some  lew  exceptions  corporate  existence  is  not 
made  to  depend  upon  the  filing  of  the  articles  in  the  local  eoimty 
offices.  In  any  event,  where  such  filing  is  not  had,  the  corporation 
is  treated  as  a  corporation  de  facto,  if  not  de  jure,^  The  fore- 
going is  certainly  true  in  the  absence  of  any  proceedings  by  the 
State  in  the  nature  of  quo  warranta.*  .     ,  ^  ^ 

In  some  States  the  filing  of  articles  in  designated^  offices  is 
specifically  made  a  condition  precedent  to  the  legal  existence  of 
thTcorporation,  while  in  others  it  is  merely  made  a  condition 
precedent  to  the  right  of  the  corporation  to  engage  in  business  as 
such.*  It  has  been  held,  however,  in  Missouri  that  in  order  to 
the  creation  of  corporate  existence  artieles  must  be  filed  m  both 

State  and  county  offices. ^  .  .  .     ^  ax. 

At  the  present  time  it  is  safe  to  say  that  as  to  third  parties  the 
validity  of  corporate  existence  will  be  presumed  even  when 
articles  have  not  been  filed  in  local  county  offices  as  required. 
But  in  some  jurisdictions  attempts  have  been  maiie  to  hold  the 
incorporators  liable  as  partners  under  such  conditions. 

&  81    Diatinction  between  de  jure  and  de  facto  Corporations.  —  A 

Con)oration  de  jure  is  one  whose  right  to  exercise  corporate 
fungous  would  prove  inyuhierable  if  assaUed  by  the  State  in  quo 
warranto  proceedings.^  A  de  facta  corporation,  on  the  other  hand, 
is  one  the  legality  of  whose  existence  may  be  inquired  into  by  the 
State  m  quo  warranto  proceedings.  The  general  rule  is  that  to 
prove  tiie  existence  of  a  corporation  de  facto  it  is  necessary  to 


1  Loverin  v.  McLaughlin,  161 BL  417  j 

44  N.  E.  99. 

•  Curtis  V,  Tracey,  62  HI.  Ap.  49 ;  B. 

&  T.  Co.  V.  Gade,  ^5  111.  181 ;  Johns  v. 
People,  25  Mich.  499 ;  Whitney  v.  Wyman, 
101  U.  S.  392.  . 

8  Bank  v.  Davies,  43  Iowa,  424 ;  Martin 
V.  Deetz,  102  Cal.  55 ;  36  Pac  868 ;  I.  T., 
etc.  Ca  ».  Hwkiaiwr,  46  Ind.  142;  Hiun- 
phiey»  ».  HooAey,  5  Col.  282 ;  Sims  v. 
Commonwealth,  24  Ky.  L.  Rep.  159;  71 
S.  W.  929  ;  Childs  v.  Hard,  32  W.  Va. 
66 ;  9  S.  B.  362 ;  Abbott  v.  Co.,  4  Neb. 
416. 

«  Bergeron  ».  Hobbs,  96  Wifc  641 ;  71 


N.  W.  1056 ;  In  re  Shakopee  Mfg.  Co.,  37 
Minn.  91 ;  33  N.  W.  219 ;  G.  M.  &  S.  Co. 
V.  Richards,  95  Mo.  106 ;  8  S.  W.  246. 

6  Hurt  V.  Salisbury,  55  Mo.  310. 

«  See  P.  &  G.  T.  Co.  v.  «obb,  88  Ky. 
226;  10  8.  W.  794;  B«MliMk  v,  Dertnw 
richer,  55  How.  Pr.  516;  4  Abb.  New 
Cases, 444 ;  F.  G.  B.  &  T.  Co.  v.  Gade,  55 
Bl.  181;  N.  Y.  N.  Exchange  Bank  v. 
Crowell,  177  Pa.  313  ;  35  Atl.  613  ;  Clegg 
V.  Company,  61  la.  121;  15  N.  W.  865; 
Gent  V.  Company,  107  BL  652;  CMldg*. 
Hurd,  32  W.  Va.  66 ;  9  8.  B.  862. 

1  Clapp  0.  Compaaj,  40  Hebw  470;  IS 
N.  W.  9i6. 

87 


§  82    INCORPORATION  AND  ORGANmTION  OP  CORPORAJIONS,    [PABT  I. 

show  (1)  an  act  authorizing  the  creation  of  a  corporation  of 
that  character;  (2)  an  application  duly  made  thereunder  bj 
the  requisite  number  of  ineofporatorB  praying  for  inecMrponilioii. 
(8)  It  is  sometiioes  neoeMarj,  althooi^  not  always,  to  show 
user  thereander.i 

§  82.  Right  of  Parties  other  than  the  State  to  collaterally  im- 
peach Corporate  Exiatence.  —  The  right  here  referred  to  has  already 
been  considered  somewhat  at  length  in  connection  with  a  diaeiis- 
aion  iji  the  right  of  third  partiea  to  ooUaterally  attack  corporate 
purposes  and  powers.*  There  are  some  additional  matters, 
however,  not  akeady  discussed  to  which  attention  will  now  be 
called. 

As  has  already  been  suggested,  the  courts  have  taken  Taried 
and  conflicting  views  relative  to  the  ri^^t  ol  partiea  other  than 
the  Slate  to  odlalerally  attack  the  existence  of  a  corporation  with 
whom  they  chance  to  be  involved  in  litigation.  The  diverging 
views  here  referred  to  may  be  classified  as  follows :  (1)  the  view 
that  the  State  alone  can  test  the  question  whether  or  not  a  corpo- 
ration which  has  procured  a  charter  from  the  proper  State  officials 
is  in  kw  as  well  as  in  fact  a  C(»pmtion  (2)  the  view  that  this 
question  may  he  inquired  into  by  third  parties,  but- that  it  is  suffi- 
cient in  such  cases  for  the  corporation  to  show  substantial  com- 
pliance with  the  conditions  prescribed  by  the  general  incorporation 
act  in  order  to  prove  that  it  is  a  corporation  de  jure  as  wdl  as  de 
Sad»;^  (8)  the  view  that  the  matter  may  be  hiqaired  into  by  thbd 
partleSy  and  that  under  soch  drenmstances  it  is  necessary  that  the 
corporation  shall  show  strict  compliance  with  each  and  every  con- 
dition precedent  prescribed  by  the  general  incorporation  act  in 
order  to  establish  the  fact  that  it  is  a  corporation  die  jure  as  well 
aMdefacto.^ 

For  porpose  ci  convenience  these  three  diverging  views  may  be 


^  Stout  V.  Zulick,  48  N.  J.  Law,  599  ;  7 
Att.  362  ;  Haas  i'.  Baok,  41  Neb.  754  ;  60 
9.  W.  M;  Daggaa  v.  Company,  11  CoL 
113 ;  17  Bu.  106 :  CMitna  Ag.,  etc  Am^ii  v. 
Company,  70  Ala.  120 ;  Baker  v.  Backus, 
32  111.  79 ;  Hughes  v.  Bank,  5  Litt.  (Ky.) 
45;  Buffalo,  etc.  Ry.  Co.  v.  Cary,  26 
N.  Y.  75;  rinnegan  v.  Noerenberg,  52 
Mimi.  S89;  9S  N.  W.  1150;  Continental 
TM  Co.  9,  T.,  Me.  Ry.  Co.,  82  Fed.  Ut; 
City  of  Guthrie  v.  Territory,  1  Okla.  188; 
81  fte.  190;  A.L^ete.Ca  v,M.,«le.B. 

8S 


Co.,  157  HI.  641  ;  42  N.  E.  153  ;  In  re  Gibbt 
Estate,  157  Fa.  St.  59 ;  27  Atl  383. 

•  See  ante,  §  6. 

*  See  ante,  §  6. 

*  Jooee  V.  Compeajr,  21  Col.  263 ;  40 

Fac.  457 ;  Stout  v.  Zvlick,  48  N.  J.  L. 
599 ;  7  Atl.  362 ;  Finnegan  v.  NocMbeig, 
52  Minn.  239  ;  53  N.  W.  1150. 

•  Mokelumne,  etc.  Co.  v.  "Woodbury, 
14  CaL  424 ;  Lacas  v.  Bank,  2  Stew.  (Ala.) 
147. 


CHAP,  n.] 


PBOCUBINO  THB  GHABfBI 


§  82 


distinguisbed  as  follows:  referring  to  the  first  as  to  tiie 
second  as  the  substantial  compliance,  and  the  third  as  tiie  strict 
compliance  rule.   Space  will  permit  of  discussion  here  of  only 
the  first  of  the  rules  just  referred  to. 

The  legislatures  alon^,  as  has  been  shown,  can  create  a  corpora- 
tion.   Under  the  modern  practice  these  bodies  ha^e  passed  general 
incorporation  acts  entrusting  the  execution  of  the  law  to  the 
executive  department  of  the  government.   Under  the  rule  now 
generally  established,  either  by  statute  or  judicial  construction, 
in  most  of  the  States  a  corporation  becomes  a  corporation  de  facto 
from  the  moment  the  charter  or  certificate  of  incorporation  is 
issued  by  the  proper  State  authorities.*  The  bads  of  holding 
such  certificates  as  conclusive  of  corporate  existence  as  against 
all  the  world  except  the  State  is  that  where  by  reason  of  such 
certificate  a  corporation  is  held  out  to  the  world  as  ready  to  under- 
take  business,  most  disastrous  consequences  would  follow  to  com- 
mercial  undertakings  if  any  private  person  was  allowed  to  go  bad^ 
and  enter  into  an  examination  of  the  circumstances  attendmg  the 
original  ineorporation.* 

The  power  which  creates  the  corporation  it  is  needless  to  say 
should  alone  have  the  power  to  take  it  away.  It  should  not  be 
permitted  to  parties  other  than  the  Stote  for  this  reason  to  col- 
laterally impeach  corporate  existence,  for  to  permit  such  impeach- 
ment  would  be  in  legal  effect  to  permit  third  parties,  for  the 
purpose  at  least  of  that  particular  action,  to  destroy  the  effect 
of  the  previous  action  of  the  State  in  the  premises.   On  grounds 
of  public  policy  as  to  all  parties  but  the  State,  it  should  under 
such  circumstances  be  conclusively  presumed  that  the  stetotory 
requirements  relative  to  incorporation  have  been  duly  complied 
with.*    A  corporation  must  of  necessity  be  presumed  to  be 
rightfullv  in  posaesdon  of  the  franchise  and  rightfully  exercis- 
ing the  power  which  the  legislative  grant  oonfenu  Individual 
right  is  not  invaded  if  the  presumption  is  tree  in  feet  and  tliere 
is  no  usurpation.    It  is  the  State  — the  sovereign  —  whose 
righto  are  invaded  and  whose  authority  is  usurped.   The  in- 
dividual  could  not  eroate  the  corporation,  could  not  grant,  define, 
or  timlt  ito  powers ;  any  grant  o|  these  by  the  BOfmign  cannot 

1  Sm  ante.  I «  >  Tar  River  Nar.  Co.  v.  Neal,  3  Hawki 

«  Lake  Supeiiof  Co.     MoiriMa,  22  (N.  C),  520;  Welch  »  Buk,  122  N.  Y. 
CMdsaP.m  177i25N.B.269. 


§  83  INCORPORATION  AND  ORGANIZATION  OP  COBPORAHONS.  [PABT  I. 

lessen  his  right.  There  can  consequently  be  no  cause  (d  com- 
plaint by  the  citizen,  and  no  right  to  inquire  whether  the  corpo- 
rate existence  is  ri^^tful,  de  jwre^  or  merely  colorable.^ 

Corporations  may  exist  eithef  de  jure  or  de  facto.  If  of  the 
latter  class,  tliey  are  under  the  same  protection  of  the  law  and 
governed  by  the  same  legal  principles  as  those  of  the  former  so 
long  as  the  State  acquiesces  in  their  existence  and  exercise  of  cor- 
porate functions.  A  priTate  citizen  whose  r^ts  are  not  invaded 
and  who  has  no  cause  of  complaint  has  no  right  to  inquire  col- 
laterally into  the  legality  of  its  existence.  This  can  only  be  done 
in  a  direct  proceeding  on  the  part  of  the  State  from  whom  is  de- 
rived the  right  to  exist  as  a  corporation  and  whose  aatbority  is 
nsnrped.^ 

A  corporatimi  de  faeto  may  legally  do  and  perform  every  act 
and  thing  which  the  same  entity  could  do  and  perform  were  it  a 
de  jure  corporation.  As  to  all  the  world  except  the  paramount 
authority  under  which  it  acts  and  from  which  it  receives  its 
charter,  it  occupies  the  same  position  as  though  in  all  respects 
valid,-  and  even  as  agunst  the  State,  except  in  direct  proceedings 
to  arrest  its  usurpation  of  powers,  its  acts  are  to  be  treated  as 
efficacious.' 

Finally,  it  may  be  observed  that  the  principle  here  contended 
for  has  been  held  by  at  least  one  court  to  be  applicable  to  a  case 
where  a  corporation  had  incorpwated  under  an  unconstitutional 
law,  yet  nevertheless  the  validity  of  the  corporation's  existence 
could  not  be  collaterally  attacked,  as  it  had  been  chartered  by  the 
implied  consent  of  the  State.* 

§  83.  Right  of  State  to  attack  Corporate  Badstanoe  la  Diieet 
Firocaedings.  —  This  section  has  reference  only  to  actions  brought 
by  the  State  for  ^  purpose  of  testing  the  legality  of  corporate 
existence  where  it  is  alleged  that  there  has  been  a  failure  on  the 
part  of  the  incorporators  to  perform  all  the  conditions  prescribed 
by  statute  as  a  precedent  to  corporate  existence.  The  action  here 
referred  to  is  that  ol  quo  warramto^  which,  even  in  the  abnenee  of 
statutory  provision,  may  he  maintained  at  cmnmon  law  in  b^alf 
of  the  State  against  incorporators  who  assume  to  exercise  corpo- 

• 

»  Uhman  v.  Warner,  61  Ala.  455.  «  People  ».  LaBns,  67  Cal.  S26 :  8  P««. 

*  8dd«(>«  SoBi' Co.  ».  Iter,  n  Ala.  84.  .  o^:*. 

224  ;  8  So.  658;  Tu  Bhw  Bur.  Co.         *  Bidiudt ».  Biak.  76  Miim.  196 :  77 

iiMi,8Hswb(N.a).HaL  ir.w.att. 
90 


CHAP,  n.]  PBOCUBIKG  THE  CHAETEE. 


§83 


Tate  powcw  without  being  legally  iacorporated,  for  the  purpose  of 
ouBHiig  them  from  flie  exensiae  of  auch  powers.i 

In  all  such  proceedings  aa  againat  the  Stote  not  merely  a  de 
facto  corporate  existence  must  be  shown,  but  a  exiatenee 
as  well.  The  general  prevailing  view  at  the  present  time  aaema 
to  be  that,  as  against  the  State  in  such  proceedings,  it  is  necessary 
to  show  a  apecifec  statute  authoriring  the  creation  of  corporations 
of  the  character  of  the  one  agaimit  which  the  qm  warranto  pro- 
ceedings are  brought,  and  also  substantial  comphanoe  m  the 
preliminary  organization  of  the  corporation  with  all  condition, 
precedent  prescribed  by  statute.* 

In  quo  warranto  proceedings  the  burden  of  proof  is  upon  the 
corporation  to  show  that  it  has  been  legally  incorporated.  In 
the  proceedings  of  the  character  referred  to  it  haa  b^n  well  said 
that «  public  policy  demands  that  the  power  to  onat  d*  ooi^ 
porations  from  the  exercise  of  corporate  powers  because  of  faUare 
to  comply  substantially  with  conditions  precedent  be  sparingly 
exercised  "  ^ 

Were  the  rule  otherwise,  disaatrons  conaequonoea  would  follow 
in  the  commercial  world,  and  in  all  such  cases  the  .oonrta  should 
talce  extraordinary  care  to  see  that  the  rights  of  third  partwa  are 
fully  protected.   In  proceedings  brought  by  the  State,  the  most 
important  matter  to  be  looked  at  ia  whether  there  has  been  a 
failure  on  the  part  of  the  ineorporatora  to  comply  with  the  pro- 
visions of  the  statute,  which  are  merely  directory  aa  oppoaed  tj) 
those  that  are  mandatory.    A  "  directory  "  provision  ia  one  which 
the  legislature  did  not  intend  as  essential  to  corporate  existence, 
and  the  failure  to  comidy  witli  which  is  a  mere  irregularity  and  is 
not  fatal  to  corporate  existence.   A.  "mandatory"  provision,  on 
the  other  hand,  is  one  which  must  be  aubetantially  complied  with 
in  order  to  create  a  corporation  dejurefi  Whether  the  partkmlar 
wovision  of  the  statute  is  directory  or  mandatory  is  to  be  deter- 
mined by  «the  intention  and  true  meaning  of  the  legislature 
deduced  from  the  act  and  sometimea  uded  by  other  acts  t*  pan 

1  OreNie  v.  People,  150  m.  813 ;  87       •  Peojd.  ..  towden  (Cel.)  8  Pac.  66^ 
H  B^A  IXiggan  »•  CniMiwy.  "  Colo.  113; 

■  •  State  ».  Webb,  97  Ala.  Ill ;  12  So.  17  Pac.  105. 
877:  People  v.  Selfridge,  52  Cal.  331;       »  Newcomb  ».  Bee^, 

Sta^  V.  Critchett,  37  Minn.  13  ;  32  N.  W.  B.  W.  S.  ^^-^^^T^^'* 

787  ;  Holman  «.  State.  105  Ind.  569;  5  146M»»«»;  « 
N.  E.702.  .j^ 


§  84  mcommATioN  and  oboanization  op  corporations,  [part  I. 


mMeria  and  extraneoiu  circmnstances."  ^  Even  as  against  the 
State  it  is  only  necessary  that  a  mandatory  provision  shall  be 
substantially  coraplied  with.2 

§  84.  When  doM  Corporate  BstetaBoe  oomoMBoe  ?  —  Where  tiie 
Statute  provide*,  as  it  does  in  some  of  the  Commonwealths,  that 
the  articles  of  incorf^tion  shall  be  filed  with  State  officials  or 
in  some  local  county  office  or  both,  the  general  rule  is  that  the 
corporate  existence  dates  from  the  time  of  filing  of  the  articles 
with  such  officials  and  not  from  the  time  it  begins  to  do  business.* 
The  foregoing  seems  to  be  the  rale  in  foree  in  the  majority  of 
States.    Some  of  Ihe  States,  however,  provide  by  statute  as 
lo  when  corporate  existence  shall  commence,  as,  for  example, 
Alabama,  California,  Colorado,  Connecticut,  Delaware,  Idaho, 
Iowa,  Kansas,  Kentucky,  Maine,  Massachusetts,  Michigan,  Mis- 
sissippi, Missouri,  Montana,  Nebraska,  Nevada,  New  Hampshire, 
New  Jersey,  New  York,  North  Dakota,  Ohio,  Pennsylvania,  Rhode 
Islai^,  Sooth  Carolina,  South  Dakota,  Tennessee,  Texas,  Utah, 
Virginia,  Washington,  West  Virginia,  Wisconsin,  and  Wyoming.* 
In  a  number  of  the  States  corporate  existence  depends  not  merely 
upon  filing  articles  with  the  Seeretary  of  State,  hat  also  iling 
the  same  in  the  local^reom^  oSoe  ol  the  eoonty  where  the 
prindpal  plaoe  €i  hoslness  of  Ihe  corporation  is  to  be  located, 
as,  for  example,  in  Arizona,  California,  Colorado,  Delaware, 
Idaho,  Maryland,  Montana,  New  Jersey,  Utah,  and  Wisoonnn. 
In  some  few  of  the  States  the  statute  by  rsason  <^  its  pecnllar 
provision  seems  to  eontaapli^  tiie  COTpomte  exbtence  shalf  com- 
mmm  heiim  the  filing  of  articles  of  mcorporation  with  any 
official,  cither  State  or  county  ;  this  for  the  reason  that  the 
certificate  required  to  be  filed  with  such  officials  must  be  signed 
by  corporate  officers.    States  to  which  reference  is  here  made  Mm 
Arkansas,  Illinois,  Indian  Terriu»y,  Maine,  Mawachnsetts,  Ifiehi- 
gan,  and  Missosri. 

1  CroM  V.  Company.  17  111.  54;  Eak-  «  Hanna  v.  Company,  23  0.  St.  622- 
nght  9,  ODmpany.  18  lad.  404;  Newcomb   G.  M.  &  S.  Co.  t;.  Richards.  95  Mo.  106  8 

\*  a  W.  146 ;  Humphreys  v.  Mooney,  5  Colo. 

2  People  V.  Company,  97  Cal.  276 ;  32  SM ;  V.  C.  BaOiraj  Co.  v.  CUyea,  21  Vt. 
Pac.  236;  State  v.  White,  13  Mo.  Appeals  30;  Borough  of  Braddock  ».  CompMir,  ISf 
139;  People  v.  Cheeseman,  7  Colo.  376;  Pa.  379;  42  Ml  15;  Badger  Paper  Co. 
3  Pac.  716:  Newcomb  y.  Reed,  12  Allen,  v.  Rose,  95  W^'  45;  70  N.  W.aOS;  Hlmt 
S62;  Eakright  v.  Company,  14  Ind.  404;  r.  Company,  11  Kan.  412. 

W^taniflk  V.  Bneket,  IS  Maw.  M ;  B.  W.  «  See  Part  II.,  Synopsis-Digest  of  the 
a.  Co.  ».  Inhabitants  of  Wmimtm,  146  CotporatioB  Uwi  ol  tht  M?enl  States 
lfaii.462;  16M.S.4Sa  MMm.  * 


chap.il] 


PBOGUaiNG  THE  GHABTEB. 


§84 


There  seems  to  exUt  in  some  jurisdictions  the  theory  that  in 
the  matter  of  determining  when  the  corporate  existence  com- 
mences reference  must  he  had,  first,  to  the  primary  franchise  of 
being  a  corporation  vesting  in  the  incorporatoi-s  and  nei^to  tt^ 
secondary  franchise  to  do  certain  specific  acts  which  vesto  m  the 
corporation.^  Again,  in  some  States,  while  filing  articles  of  mcor- 
powtion  constitutes  a  condition  precedent  to  the  creation  of  cor- 
borate  existence,  it  is  also  n  condition  pfooedent  to  the  nght  of 

doing  business.'  ^ 

Ordinarily  corporate  existence  docs  not  wmmenoeorta  aU  eon- 

ditions  precedent  are  performed.'  There  is  a  very  obvious  distinc- 
tion hJLm  mxOx  act.  88  are  declared  to  be  necessary  steps  in  the 
process  of  incorporatioii  and  8ueh  as  are  required  of  the  individ- 
uals seeking  to  become  incorporated,  but  which  J»T 
prerequisites  to  the  assumption  of  corporate  power..  With 
to  the  former  any  material  omission  will  be  fatal  to  ita  exwtenoe 
ui  *  corporation  de  jure,  a.  against  the  Statfe.    In  respect  to  the 
latter,  failure  to  comply  tiierewith  i.  not  ordinarily  accompanied 
by  forfeiture  of  its  charter  power.,  but  rather  goes  to  the  question 
of  the  personal  liability  of  the  individuals  who  attempt  to  do 
busittCM  88  a  corporation  without  having  complied  with  aU  the 

conditions  subsequent*  ,.1 

Corporate  existence  in  this  immediate  connection  ordinarily 
means  full  authority  to  transact  busineM  88  such  in  f^twdi^ 
tinction  to  the  qualified  existence  of  such  corporations  whwh  dates 
from  the  time  of  filing  the  articles  of  association  with  the  Secre- 
tary of  SUte.f*  So  too,  in  those  States  where  organization  precedes 
the  filing  of  a  certificate  of  incorporation,  it  has  been  held  that  a 
corporation  has  a  qualified  existence  from  the  date  of  the  toaor- 

porators'  first  meeting.* 

In  lUinois  corporate  existence  does  not  commence  nntd  the 
Koeption  of  a  lioenw  from  the  Secretary  of  State  to  take  stock 

>  state.  WM«Co,6lK«.M7;  60  f , ^  =  ^^^'UVt^!^.^ 

^                 Til  ^fi7.  i«  *  Hmod  V.  Hamer,  32  Wis.  162;  E. 

2  Gade  v.  Company,  165  lU.  367;  «  ^'T^^  A  ^^.cSj  T  Fn  iiR-  18 

„               ^.  ^             I  AO  Pa]  as*  6.  L.  Co.  V.  Green,  46  iS.  J.  r.q-  »o 

N.  E.  286;  Martin  v.  Deetz,  108  KM.  o»,  r_  „      n«  „  w^Midhnrv  14 

36Pac.368;  /« r»  a M. 37  Miim.  91 ;  Atl.  844;  M.  H.     Co. Woodbiwjr.  14 

«•  v  w  910  •  Jf^ms  V.  aK>l>Ie,  25  Mich.  Cal.  424. 

^   P  M  ^  i^^  mZ^      Ma       '  Hurt  r.  Salisbury,  55  Mo.  310. 

*  a  Q  w  L  6  s.  G.  &  P.  Co.  V.  Scholfield,  70  Ck»li. 

106 :  8      W .  24o.  , 

8  Afferton  v.  Company,  67  Ind.  334;  500  ;  40  AtL  182. 
Borough  of  Braddock  v.  Company,  189  ^ 


§  84  INCOBPORATION  AKD  OBOAKKATIOH  OF  CCOPORATIOIIB.   [PAW  j. 

subscriptions.!  It  would  of  course  foUow,  from  the  necessities  of 
the  case,  that  before  a  oorp<Mration  can  contract  as  such,  it  must 
have  a  fuU  md  complete  organization .2  While  ordinarily  such 
organization  is  not  necessary  to  the  commencement  of  corporate 
existence,  it  is  sometimes  made  so  by  statute.^ 

^«  "i"  '  -  '  ^'  S*-  ««8 ;  U.  R.  Co.  V.  Ilolden,  63  N.  C. 

2  r^^*  27  m.  Ap.  M2.  410 ;  Teitig  v.  Boesman,  12  Mont.  404 ; 

2  Gent  V.  Company,  107  111.  652.  31 371.  * 

^  A.  &  N.  T.  By..  Co.  v.  Saith,  15 


CHAP,  m.]        OBGANIZiTIOH  APTBl  DICOBPOBATIOII. 


CHAPTER  m 
ORGANIZATION  OF  COBPaRknONa  AITBK  mOOBPOHAIION. 

8  85.  The  incorpor.tor.'  Or,»l«lton  M.«W-That  a  cor- 
poration shall  have  a  full  and  ^'^V^^'^'^P^^'^f^^T^ 
„  an  entity  before  it  can  enter  into  any  kind  of  contrmct  or 
Sansact  any  busiaess,  would  seem  to  be  self-evident.   A  conK,«- 
tion  until  ipmi-tio"  has  no  fnmchiaea  or  faculties.   Its  ex  st- 
r^e  beforeTbut  a  qualified  existence,  ^^.f  ^^J^^^ 
for  the  time  being  to  the  right  to  organize  itseU  mto  .n  active 
eorporate  organization,  and,  as  we  have  seen,  those  engaged  m 
it  into  being  have  no  power  to  bind  it     contrac  unless 
rSthori«ed  by  the  charter.   Until  organization  as  author. zed 
Z  the  charter,  ii  does  not  possess  the  right  to  exercise  its  cor- 
porate functions,  nor  has  it  a  valid  existonoe  for  aU  I»";P«--\ 
In  this  connection  it  was  observed  m  a  leading  case,  that  it 
often  stated  in  the  books  that  a  corporation  is  created  by  its 
Charter.   This  is  not  precisely  correct.   The  charter  only  confers 
L  life  and  provide,  the  instruments  by  which  it  may  become  an 
Sing  entity    Such  a  corporation  ha.  been  weU  defined  to  be  an 
artificial  being,  existing  only 

instruments  provided  to  bring  the  artificial  being  into  «^ve 
operation  are  the  persons  named  in  the  charter  »iose  who 
bVvirtue  of  it.  provisions  may  become  assoc.ated  with  them. 
These  persons-the  incorporator. natural  persons  have  no 
such  power.  The  charter  confer,  upon  ^'^^l^^Z 
this  purpose,  a  faculty  which  they  can  have  only  by  virtue  of  the 

law  which  confers  it."  ^  i       a.  ^ 

The  better,  if  not  the  prevailing,  rule  appears  to  be,  that  not  only 
ai^  the  inc6rporator.  named  in  the  articles  ofj^W-;^^"" 
entitled  to  participate  in  the  organi«tion  rf."*  »^ 
aU  subscribers  to  the  preliminary  stock  subscnpUon  to  the  capital 
Btock  of  the  proposed  corporation  may  do  so.» 

„         „iMTll«S*.  »  Baltimore  City  Pass.  Ry.  Co.  i>.  Ham- 


§  87  INCORPORATION  AND  ORGANIZATION  OP  COBPOJUWOKg.  [PAET  I. 

§86.  OrganiMtioii  Meeting,  how  called.  — The  more  reeoiit 
incorporation  acts,  sucli  as  are  in  force  in  Coniiecticat,  Maine 
Massachusetts,  New  Je«ej,  North  Carolina,  and  West  Virginia 
point  out  apeeificaUj  how  the  organization  meeting  of  a  corpora^ 
ti«i  IS  to  be  ealled.  Where  no  such  statutes  exist  the  better  and 
nfer  practice  is  for  ail  the  incorporators,  as  well  as  the  subscribers 
to  the  preliminary  subscription  agreement  to  the  capital  stoek  of 
the  proposed  corporatiim,  to  sign  a  waiver  and  agreement  fixing 
tlie time  and placefortheorganization  meeting  of  the  corporation.^ 

It  has  been  held  that  all  are  not  required  to  be  present  at  the 
organization  meeting  who  sign  the  articles  of  incorporation  unless 
the  statute  requires  it  A  majority,  it  is  said,  is  snffieients  Hie 
safer  practice,  however,  is  to  comply  wi«i  tiie  rale  stated  above* 
^  Vii^nia  is  one  of  the  few  Stetes  possessing  a  statute  giving  the 
mcorporators  the  right  to  assign  their  interests  as  such  in  a  pro- 
spective  corporation.  Failure  to  call  a  meeting  as  provided  bv 
statute  is  to  be  regarded  as  a  breach  of  a  condition  sabeeqoent 
and  is  not  fatal  to  the  crealaon  <rf  a  valid  corpora^on.^ 

§  87.  C^itttetliMi  Msetiiig;  wlim  held. —It  was  laid  down  at 
•n  early  date  by  tiie  Supreme  Court  of  Maine  in  Miller  v.  Ewer,s 
that  all  acts  and  proceedings  of  persons  pretending  to  act  in  the 
capacity  of  incorporators  when  assumed  without  the  bounds  <rf  the 
sovereignty  granting  the  charter  are  absolntely  void.  The  prin- 
ciple  established  in  Miller  Bwer  has  been  quite  generally 
adopted  in  other  parte  of  the  country .« 

The  reasoning  of  these  cases  is  to  the  following  effect :  the 
charter  bestows  upon  the  incorporators  certain  privileges  which 

14-  Wend.  24 ;  Nickum  v.  Burkhardt,  30       «  27  Me.  509 

Ore.  464;  47  Pac  788 ;  Waukon,  etc.  Ry.       6  Freeman  v.  Company,  38  He  843* 
Ca.  V.  Dwyer,  49  la.  121 ;  Instone  r.  Cora-   Smith  v.  Compauv  64Md  85   20  Atl 

^V^^^i^'^'-'^'TL^'^'    1032  ;  Camp  A^ie^Mo.  525  Hu^ 
S^/'/J^'  I?  ^  P^~y«      Mooney,  5  Col.  282-  Dake  v 

I  B.  B.  R.  Co.^.  Buck.  68  Me.  81.         „.  IWh,  u  h.  J.  Eq.  880;  O^meby  r 
^  Packard  v,  Co.,  IW  M«i.        46   Company.  56  N.  Y.  623?  MitclnSlT^ 

Uig.  SOS,  f  18,aot  otiMvwiieofficiany m.  Company,  46  Minn.  454-  49  N  W  iq? • 

S^r's  ""*'  *  o-  Mcrh«  Mo! 

«  McClmch  .>  Stnrges,  72  Me.  288;  ton.  etcBy.  Co.  v.C<nri»r,  11  Wdl  459^ 

Braintree  Water  Supply  Co.    Braintroe,  Eunyan    Coster.  14 Pm^  U-J-Au^ 

iUM^,.  482 ;  16  H  E.  420;  /«  re  Brit-  Bank     Earle.  13  Peters.  .519 ; 

^8iig«raeiBiig  C0..3  K.y&J.408;  Lee,  2  S.  D.  S96;  47  N.  W.  7Q«. 

96 


CBAP.  in.]        OBOANIZATION  AFTER  INCOEPOBATION.  §  87 

they  can  powess  only  by  yirtne  of  the  law  which  confers  it;  that 
law  is  inoperative  beyond  the  bounds  of  the  legislative  power  by 
,.hich  it  was  enacted ;  that,  as  the  foregoing  faculty  cannot  accom- 
pany the  incorporators  beyond  the  bounds  of  the  soreieignty  which 
creates  it,  they  cannot  possess  or  exercise  it  there,  and  can  hate 
no  more  power  there  to  make  the  artificial  being  act  than  other 
persons  not  named  or  wsociated  as  incorporators.  Therefore  any 
attempt  to  exercise  such  a  faculty  there  is  merely  a  usurpation  of 
authority  by  persons  destitute  of  it  and  acting  without  any  leffil 
capacity  to  act  in  that  manner.    If  the  foregoing  reasoning  be 
■oond,  it  foUows  that  all  fundamental  corporate  acts  and  pro- 
ceedings when  assumed  without  the  bounds  of  the  sovereignty 
granttng  the  charter  aw  absolutely  void.  The  prmciple  here 
stated  has  been  materially  qualified  in  a  large  nunAer  of  junsdic- 
tions  by  an  extended  application  of  the  doctrine  of  estoppel.  A. 
an  exampU  of  this,  attention  is  caUed  to  the  case  of  Handlej  v. 

Stutz.*  .      ,        i.-  * 

This  was  a  case  where  a  Kentucky  corporation  at  a  meeting  of 

the  stockholders  of  the  corporatien,  held  outeide  of  a»e  State,  in- 
ci-eased  the  capital  stock  of  the  company  from  one  hundred  twenty 
thousand  dollars  to  two  hundred  thousand  dollars.  It  was  con- 
tended thrt  this  increase  was  Ulegal,  for  the  reason  that  the  meet- 
ing of  the  stockholders  authorizing  it  was  held  outside  of  the 
State  of  Kentucky.  The  court,  in  its  opinion  upon  tins  pomt, 
spoke  as  follows : 

«Nor  were  the  proceedings  of  such  meeting  any  less  binding  upon 
those  participating  in  it  by  reason  of  the  fact  that  it  wm  held  outside 
of  the  boundaries  of  the  State  under  the  laws  of  whioh  the  oompany 
was  incorporated.    By  act  of  the  Kentucky  Legislature,  it  is  pro- 
vided,  that  all  elections  for  directors  and  other  officers  by  private 
eorpotations  shall  be  held  within  the  territorial  limits  of  the  State 
of  Kentucky,  and  that  any  such  election  held  outside  of  Kentucky 
shall  be  void.  Beyond  the  election  of  officers,  however,  there  is  no 
statutory  restriction  of  corporate  action  to  tiie  limits  of  the  Stote, 
and  in  the  absence  of  such  inhiWtion  tile  proeeedings  of  such  meet- 
ing would,  with  regard  to  directors'  meetings,  be  binding  upon  ^ 
those  participating  in  it,  as  well  as  upon  those  acting  upon  the  faith 
of  its  validity  or  receiving  the  stock  authorized  to  be  issued  at  said 
meeting.  It  is  true  tiiat  tiiere  are  cases  holding  that  stockholders 


7 


» 139  u.  s.  417 ;  11  s.  ct  saa 


91 


§  88  INCORPORATION  AND  ORGANIZITION  OF  CORPORATIONS.  [PART  L  ^ 


meetings  cannot  be  legally  held  outside  of  the  home  State  of  the  cor- 
poration, but  the  question  has  generally  arisen  where  a  majority 
present  had  attempted  by  their  action  to  bind  a  dissenting  minority, 
or  had  taken  action  prejudicial  to  the  rights  of  third  persons.  In- 
deedy  so  far  as  we  know^  the  authorities  are  uniform  to  the  effect 
that  the  action  taken  at  such  meeting  was  binding  upon  those  who 
participated  in  or  partook  of  the  benefits  of  them.  In  this  case  the 
meeting  was  attended  by  all  the  stockholders  bnt  two,  who  were 
present  by  proxy.  The  vote  increasing  the  stock  was  unanimous, 
and  it  does  not  lie  in  the  mouth  of  those  who  participated  in  this  act, 
or  received  the  stock  voted  at  this  meeting,  to  question  its  validity.*** 

Unquestionably  the  legislature  has  the  legal  right,  in  the  absence 
of  constitutional  proyision,  to  provide  that  ail  meetings  of  cor- 
porations, whether  oipmizatioii  oit  otiierwise,  maj  be  held  outside 
the  State  > 

§  88.  steps  Necessary  to  complete  Organization.  —  The  princi- 
pal matters  which  demand  attention  at  the  organization  meeting 
of  a  corporation  muy  be  enumerated  as  follows :  (1)  the  adoption 
of  by-laws ;  (2)  Section  of  directors ;  (S)  providing  for  the  issue 
and  payment  of  tiie  capital  stoek  of  the  corporation.  The  snbject 
of  the  adoption  of  by-laws  and  the  payment  of  the  capital  stock  of 
the  corporation  will  be  left  for  subsequent  consideration." 

With  respect  to  the  matter  of  the  election  of  a  board  of  direc- 
tors the  following  may  be  said.  Many  of  the  inca]^[Kirati(m  acts 
require  that  the  names  of  the  first  board  oi  directors  shall -,be  set 
forth  in  the  articles  of  incorporation,  and  this  ordinarily  obviates 
the  necessity  of  electing  a  new  board  at  the  organization  meeting 
of  the  corporation.^  Unless  the  statute  so  requires  it,  it  is  not 
necessary,  in  order  to  give  the  incorporators  the  right  to  partici- 
pate in  1^  organization  meeting,  that  they  be  stockholders.^-  Bnt 
ordinarily  it  is  contemplated  by  the  incorporation  acts  that  the 
incorporators  shall  be  stockholders  or  subscribers  for  capital  stock. 

1  See  to  the  same  effect  Heath  v.  S.  L.  ^  Hammond  v.  Straus,  53  Md.  1 ;  Per- 

Min.  Co.,  39  Wis.  146;  O.  &  M.  Ry.  Co.  v.  kins  v.  Borders,  56  Miss.  733;  Proprie- 

If cFhenon,  35  Mo.  13 ;  Onnsbj  v.  Ym-  toa,  ete.  v.  Dickinson,  S  Gray  (Mass.),  586 ; 

moDt  Min.  Co.„56  N.  Y.  632 ;  Umnphfey  Cqjiiifte  v.  RaUe,  8  Ongon,  S84;  Deii8> 

V.  Mooney,  5  Col.  282 ;  Wright  v.  Lee,  2  more  Oil  Co.  v.  Densmore,  64  Pa.  St.  43 ; 

S.  D.  596;  57  N.  W.  706 ;  T.  M.  Co.  v.  Singer  Mfg.  Co.  v.  Peck,  9  S.  D.  29;  67 

Goodhue,  18  N.  C.  981.  N.  W.  947  ;  Kamsey  v.  Tod,  95  Texas, 

«  Graham  v.  Co.,  118  U.  S.  161 ;  6  Sup.  614 ;  69  S.  W.  133 ;'  Byrnes  v.  Beck,  10 

Ct  1009.  GiL  121 ;  B.  B.  &  T.  Co.  v.  J.  B.  T.  Qo. 

•  Hamihoii  Tiiiit  C&  v.  Ckmtm,  168  101  Tenii.  54S ;  48  &  W.  9S8;  Weditel- 

N.T.483;  57N.E.ei4.  bog V. Bfe^ M fM. Ml 

'98 


CHAP.  III.J         ORGANIZATION  AFTER  INCORPORATION.  §  89 

The  right  to  vote  stock  is  an  incident  to  stock  ownership,  and  was 
recognized  at  common  law  as  a  property  right.^ 

In  some  few  of  the  States,  statutes  exist  limiting  the  right  of 
stockholders  to  own  more  than  a  certain  percentage  of  the  total 
stock  of  the  corporation. ^ 

Sometimes  the  incorporators  are  appointed  commissioners  to 
take  stock  subscriptions.  It  has  been  held  that  the  failure  of 
such  commissioners  to  take  the  oath  of  office  as  required  by 
statute,  will  not  render  the  subscriptions  void.'  Where  anthority 
to  open  books  of  suV)scription  is  given  by  statute  to  the  incorpora- 
tors, this  authority  may  be  exclusive,  so  that  subscriptions  cannot 
lawfully  be  received  by  others.  Such  subscriptions,  however,  may 
'  of  course  be  ratified  by  proper  parties.^ 

Ordinarily  the  election  of  officers  is  by  statute  devoWed  upon 
the  board  of  directors.  However,  in  some  few  of  the  State*  cer- 
tain officers  are  required  to  be  elected  by  the  stockholders. 

§  89.  Adoption  of  By-Laws.  —  A  by-law  is  in  effect  a  contin- 
ning  rule  of  action  for  the  government  of  the  corporation,  its  mem* 
bers  and  officers.*  The  purpose  of  a  by-law  is  to  regulate  and 
define  the  duties  of  the  stockholders  between  themselves  and  the 
conduct  of  the  officers  and  the  management  of  the  corporate 
affairs.^ 

All  corporations  have  the  implied  power  to  make  by-laws  for 
the  government  of  the  corporation  and  the  management  of  its 
affairs.^  Unless  otherwise  provided  by  statute,  the  by-laws  must  be 

adopted  by  the  incorporators  at  their  organization  meeting  or  else 
by  the  stockholders  at  a  meeting  duly  called  for  that  purpose.^ 

Some  few  of  the  States,  among  them  being  South  Dakota,  North 
Dakota,  and  Oklahoma,  permit  incorporators  to  adopt  by-laws, 
whether  they  are  subscribers  for  the  capital  stock  of  the  proposed 
corporation  or  not.    Statutory  provisions  exist  in  several  of  the 

1  Commonwealth  v.  Dalzell,  152  Pa.       ^  Ilollman  v.  Company,  9  Gill  &  J. 

St.  217 ;  25  Atl.  535.  (Md.)  462. 

<  Mack  V,  Company,  90  Aim,  396 ;  8      *  N.  C.  M.  R7.  Co. «.  Eslow,  40  Midi. 

So.  150;  Coram<mwMlth  v.  DetwiUer,  21S. 

181  Fa.  St.  614 ;  18  Ati.  990.   On  right       ^  N.  M.  T.  S.  Co.  v.  mOuffi  lOS  Wit. 

of  corporation  to  vote  its  own  shares  see  492 ;  79  N.  W.  785, 

McNeely  v.  Woodruff,  1.3  N.  J.  L.  352;       6  Flint  v.  Pierce,  99  Mass.  70. 

Ex  parte  Holmes,  5  Cowen  (N.  Y.),  426;       ^  Engelhardt  v.  Association,  148  N.  Y 

on  right  of  corporations  to  vote  shares  in  281 ;  42  N.  E.  710. 

another  corporation  nee  Dayii  v.  Com-      *  M.  O.  B.  Co.  v.  WTwng,  51  Ind  11. 

pnnv,  77  Md.  85;  25  AIL  982. 


§  90  INCOBPaftATIOll  AMD  OBGANIZATION  OF  COBFOBAnONB.  [PABTI. 

states,  ezpresslj  penaitting  provision  to  be  made,  if  demred,  for 
the  adopticm  of  by-laws  by  the  directors.  In  the  absence  of  any 
such  statutory  authority,  by-laws  adopted  by  the  directors  are  not 
binding  unless  subsequently  ratified  by  the  stockholders.^  On  the 
other  band,  if  the  directors  are  vested  bj  statute  with  exolusive 
power  to  pass  bj4aws,  ^ose  paned  by  the  sted^holdert  are  not 
valid.* 

The  adoption  of  by-laws  is  a  constituent  act,  and  for  this  reason 
they  must  be  adopted  within  the  State  by  whose  laws  the  corporor 
tion  was  created,  if  action  of  stockholders  is  necessary  to  their 
adoption.^  In  tiie  absoice  ol  statutory  power  or  eharter  provision, 
by-laws  can  be  altered  or  repealed  by  the  stockholders  alone.* 

In  the  absence  of  statutory  prohibition,  the  power  to  amend  or 
alter  by-laws  may  be  delegated  by  the  stockholders  to  the  direc- 
tors. In  general  by-laws  must  be  adopted  in  oonformity  to  the 
charter  and  be  reasonable  and  proper* 

The  by-laws  of  a  private  corporation  will  be  interpreted  by  the 
courts  as  interpreted  by  the  corporation.^ 

The  reasonableness  of  a  by-law  is  a  question  of  law  and  not  of 

In  drawing  by-laws  the  following  rules  should  govern:  they 
sboiild  be  made  certain  they  must  be  directed  to  all  within  the 
sphere  of  their  operation ;  *  they  must  operate  equally  upon  all  to 
whom  applied ;  tliey  must  be  lawful  as  against  members  pos- 
sessing rights,  and  must  be  reasonable.^ 

Sometimes  the  statute  requires  by4aws  to  be  adq>ted  within 
thirty  days  aftor  ineorporaticHi  and  coined  into  a  book  of  by-laws.^ 
Such  stetotes  are  clearly  directory  and  not  mandatory. 

§  90.  Election  of  Directors.  —  The  power  to  choose  a  board  of 

1  Carroll  v.  Bank,  8  Mo.  Ap.  253.  •  State  ex  rd.  Attomej-General  i;.  Conk- 

*  In  re  Kkw,  67  Wit.  40;  S9  N.  W.  Im,  S3  Wis.  21. 

S8S;  Peo|aev.ConiMm7,8SlIL4S7;  &&  t  Stele  v.  Ovwtoo,  4  Zabiiikie  (N.  J.), 

Ass'n  V.  Company,  25  Mo.  Ap.  642.  435. 

3  In  re  Klaus,'67  Wis.  40 ;  29  N.  W.  ^  Goddard  «.  MiffihllH*  Ihrfhii^,  9 

582 ;  Mitchell  v.  Cosopuj,  40  H.  Y.  Sap.  Mo.  Ap.  290. 

Court,  413.  »  Ex  parte  Frank,  52  Cal.  606. ' 

«  M.  G.  R.  Company  v.  Wysong,  51  ^  People  v.  Society,  25  Barb.  (N.  Y.)  7. 

Ind.  IS.  u  Com,  v.  WoioeBter,  3  Pick.  461 ;  King 

•  See  Kent  v.  Goa^y,  78  K.  T.  18S;  v.  Vahn,  170  ID.  186 ;  48 N.  B.  677.  Oa 
Bergman  v.  Assoda^xi,  S9  Minn.  275 ;  failaie  to  post  by-laws,  see  Iju^pm  v. 
13  N.  W.  120;  Commons  v.  Company,  12  Company,  49  la.  317. 

Pa.  St.  318;  People  v.  Cliice|;o  Board  of  12  See  Hall  v.  Crandall,  29  Cal.  567; 

Trade,  45  111.  1 18.  Clapman  v.  Doray,  89  Cal  52 ;  26  Pac  605. 
100 


CHAP,  in.]        ORGAKIZATION  AFTBB  IKCORPOBATIOH.  §  90 

directors  is  inherent  in  all  private  corporations  irrespective  of 

The  election  of  directors  in  connection  with  the  organization  of 
a  corporation  ordinarily  follows  the  adoption  of  by-laws.  After 
the  organization  the  election  of  directors  is  usually  had  at  the 
annual  meeting  of  the  corporation.  In  giving  the  notice  of  such 
annual  meeting  it  is  customary  to  specify  m  the  notice  tiiat  a 
board  of  directors  is  to  be  chosen.^ 

In  choosing  the  directors  it  is  incumbent  upon  the  incorpora- 
tors or  stockholders,  as  the  case  may  be,  to  observe  the  pro- 
visions  of  the  statutes  relative  to  tiie  number  of  directors  to  be 
chosen  and  their  qualifications  as  to  stock-holdings,  residence^  and 
citizenship  if  any  such  are  prescribed  by  statute.    In  the  absence 
of  such  statutes  as  exist  in  many  of  the  States  authorizing  the 
dividing  of  directors  into  classes,  so  that  only  a  certain  portion  of 
the  board  are  elected  annually,  the  full  board  must  be  elected  each 
year.    In  the  absence  of  statute  making  the  ownership  of  stock  A 
qualification  for  holding  the  office  of  director  such  ownership  is 
not  necessary .3    Even  where  the  statute  requires  that  directors 
shall  be  stockholders,  it  is  not  necessary  that  they  shall  become 
such  before  their  election  if  they  become  stockholders  before  enter- 
ing  upon  the  duties  of  their  office  *  In  the  election  of  directors 
by  the  incorporators  it  is  sufficient  in  order  to  qualify  him  that 
a  director  be  a  subscriber  for  stock,  though  no  certificate  has  in 
fact  been  issued.^   Where  ownership  of  stock  is  necessary  to 
qualify  one  as  a  director,  the  prevailing  rule  seems  to  be  that 
the  moment  a  director  ceases  to  be  a  stockholder,  he  oeases  to  be  a 
director  de  jure  (but  not  de  facto)  without  proceedmgs  havmg  first 
been  taken  to  remove  him.^ 

Where  a  director  is  required  to  take  an  oath  of  office  before 
entering  upon  the  dischai^e  of  his  duties,  his  failure  to  take  such  an 
oath  will  not  prevent  him  from  becoming  a  director  de  facta? 
Any  person  who  can  be  a  business  agent  for  another  can,  if  pos- 
sessed of  statutory  qualifications,  become  a  director Ordinarily 

1  Hurlbut  V,  ManhaU,  62  Wia.  590;  »  Dispatch  Light  Packet  v.  Company, 

22  N  W  852  12  N.  H.  205 ;  Wright  v.  Company,  52 

a  Merritt  v.  Ferris,  22  111.  303.  N.  J.  Eq.  352  ;  Howe  v.  Scarbaiongli 

•  Wright  V.  Company,  117  MaM.  226.  (Ala.),  85  So.  IIS. 
4  Greenough  v.  Company,  64  Fed.  22.  '  Simpioa  ^^^f^^l^J^^"""^^  ^ . 

•  MeOomb  v.  AaBodatkm.  10  N.  Y.  Sap.      «  Pteople  ».  WebiHr,  10  Wead.  (N.  Y.) 
552;  Bestir.  HeMtan, 92 hkim.  554. 


§  90  IKOaSPOBATION  AND  ORGANIZATION  OP  COBPORATIONS.  [PART  I. 

it  is  not  necessary  that  resignations  of  directors  be  accepted  iu 
order  to  become  effective.* 

Persons  owning  a  majority  of  stock  have  a  right  to  elect  direo- 
tors.2  It  is  a  fundamental  principle  in  corporation  law  that  a 
majority  of  stockholden  ahM  control  the  policy  and  regulate  the 
business  afiPairs  of  the  corporation,  and  to  this  each  stockholder 
impliedly  agrees  when  he  acquires  stock  in  the  cor})oration.3 
However,  in  order  to  insure  minority  representation  on  the  board, 
cumulative  voting  for  directors  is  permitted  in  a  large  number  of  the' 
States.^  Where  such  right  to  cumulate  votes  is  mandatory  snch 
right  cannot  be  taken  away  by  by-law  * 

The  fact  that  a  corporation  begins  business  with  an  insufB- 
cient  number  of  directors  does  not  invalidate  debts  contracted  by 
them,  nor  deprive  it  of  its  corporate  rights  and  privileges  unless 
some  action  is  taken  by  the  State  to  that  end.®   Failure  to  elect  a 
board  of  directors  annpally  does  not  work  dissolution.   The  old 
board  will  hold  over  by  implication  of  lawj    This  is  a  rule  not 
only  esta]>lishcd  by  statute  in  a  large  number  of  the  States,  but  is 
a  well  established  rule  of  corporation  law  iu  the  absence  of  such 
statutes.8   In  the  election  of  directors  a  majority  vote  of  all  present 
is  sufficient,  provided  a  majority  of  the  stock  is  represented  at  the 
meeting.*   Yacancies  in  the  board  of  directors  cannot  be  filled 
by  the  remaining  directors,  but  must  be  filled  by  the  stockholders, 
unless  such  power  is  expressly  granted  by  statute.^^^    Even  where 
the  right  to  fill  vacancies  is  given  to  the  remaining  directors  it  is 
probably  true  that  there  must  be  present  at  the  meeting  a  majority 
of  the  whole  number  of  directors  prescribed  by  the  charter,  and 
^at  such  vacancy  be  filled  by  a  majoi-ity  vote  thereof.^i 

Unless  regulated  by  statute  or  by-laws,  the  board  of  directors 
may  fix  any  place  within  tbe  domiciliary  State  at  which  annlUd 

1  Ptw.,  etc.  of  Manbattaii  Ca  r.  Kal-       »  Hanter  r.  C<mptBy,26  La.  Ann.  13. 
denberg,  165  N.  T.  1 ;  5S  N.  B.  790;       •  OhMsberiuii  v.  D.  8.  Works,  103 

Briggs  V.  Spanldinir,  141  U.  S.  155.  Mich.  124  ;  61 N.  W.  532 ;  MoMf  v.Tomp- 

2  Fanlds  v.  Yates,  57  111.  416.  kins,  84  Ala.  613;  4  So.  763. 

8  Wheeler  v.  Company,  143  111.  197;  »  Eggleston  v.  Doolittle,  3.3  Conn.  402. 
32  N.  E.  420.  10  Moses  v.  Tompkins,  84  Ala.  613;  4 

*  See  Part  in.  Table  0,  paije  579.  So.  763 ;  Kearney  v.  Andrews,  10  N.  J. 

*  Tomlin  v.  Bank,  58  Mo.  Ap.  430;  Eq.  70. 

Wnghft  9. Gcnqiuy, 67  GaL  SS2;  8  Fms.      n  Moms  v. Tompkina, 84  Ala.  613;  4 

70-  So.  763  ;  Nathan  V.  ToBpkioa,  8S  Ala. 

«  Fargason  v.  Company,  78  Miai.  65 ;  437 ;  2  So.  747. 
27  So.  877. 

102 


CHAP,  m.]        OBGAHIZATION  APTEE  IHCOEPpEATIO«.  §  90 

meetings  for  the  election  of  directors  may  be  held.^  Where  there 

are  mandatory  provisions  in  the  charter,  statute,  or  by-laws  as  to 
place  of  holding  annual  meetings  these  must  be  followed.^  Where 
the  certificate  of  incorporation  is  required  to  fix  the  number  of 
directors,  snch  number  cannot  be  changed  except  by  amendment 
thereof.* 

In  connection  with  the  general  subject  of  election  of  directors  the 
question  not  infrequently  arises  as  to  the  validity  of  the  so-called 
"  voting  trusts  "  now  becoming  so  common  iu  this  country.  The 
prevailing  and  it  is  believed  the  true  rule  on  this  subject  ia  set 
forth  in  Clowes  tf.  Miller,*  where  it  was  held  that  in  the  absence 
of  any  improper  motive  such  trusts  are  valid.*  It  is,  in  the  absence 
of  such  improper  motives,  merely  a  convenient  method  of  voting 
by  proxy. 

In  the  absence  of  statute,  charter  provision,  or  valid  by-law  to 
the  contrary,  holdm  of  preferred  stock  have  the  same  rights  in  the 
election  of  directors  as  belong  to  the  holders  of  common  stock.*  It 
has  been  held  that  stockholders  may  in  voting  for  directors  change 
their  vote  while  the  election  is  in  progress.^  Mandamus  is  the 
proper  remedy  to  compel  canvassing  of  votes  at  election  of  direc- 
tors to  determine  whether  or  not  snch  election  was  valid.^ 

In  some  of  the  States  there  are  certidn  statutory  officers  known 
as  "  Inspectors  of  Election,"  who  must  be  chosen  preliminary  to 
the  election  of  the  board  of  directors.  These  inspectors  should  be 
chosen  in  the  mode  provided  in  the  by-laws.^  Inspectors  have  no 
power,  express  or  Implied,  to  pass  upon  the  eligibility  of  directors.i^^ 
The  failure  to  have  the  inspectors  sworn  before  acting  as  such  will 
not  invalidate  an  election.^   In  the  absence  of  statutory  provinon 

1  Corbett  v.  Woodward,  5  Saw.  403 ;  «  Mackintosh  v.  Ji.  R.  Co.,  32  Fed.  350 ; 
Commonwealth  v.  Smith,  45  Pa.  St.  59 ;  54  Fed.  582  ;  Lockhart  v.  Van  Alstyue, 
Pratt  V.  Company,  35  Conn.  365 ;  Duke  31  Mich.  76 ;  Miller  v.  Ratterman,  47 
V.  Tavlor,  37  Fla.  64  ;  19  Sou.  172  ;  Hilles  0.  St.  141 ;  24  N.  E.  496. 

V.  Parish,  14  N.  J.  Eq.  380 ;  Anns  v,Ca-  ^  State  v.  McGains,  64  Mo.  Ap.  225. 

Iiant,  86  Vt.  744 ;  Hodgson  ».  Compsay,  •  State  v.  McCains.  64  Mo.  Ap.  225. 

46  MiBB.  454  ;  49  N.  W.  197.  ^  /"  re  Excelsior  Fire  Lis.  Co.,  16  Abb. 

2  McDaniel  v.  Company,  22  Vt.  274.  Pr.  8  ;  People  r.  Company,  55  Barb.  344 ; 
8  See  Matter  of  Griliia  Iron  Co.,  63  In  re  Lio:lithall  Mfg.  Co.,  47  Hun,  258 ; 

N.  J.  L.  168  ;  41  Atl.  931.  State  v.  Merchant,  37  O.  St.  251  ;  Coni- 

*  60  N.  J.  Eq  179 ;  47  Atl.  345.  monwealth  v.  Wodper,  3  S.  &  B.  (Pa.)  29. 

*  See  also  Fanlds  v.  Yatee,  57  IU.  416;  ^  In  re  St.  Lawrence  Steamboat  Co., 
Moset  V,  Scott,  84  Ala.  608  ;  4  So.  742:  44  N.  J.  L.  529. 

O.  &  M.  Ry.  Co.  V.  State,  49  O.  St.  668;  /"  re  M.  &  H.  Ry.  Co.,  19  Wend. 

32  N.  E.  933 ;  Mobile,  etc.  Ry.  Co.  v.  (N.  Y.)  135. 
Kicholas,  98  Ala.  92;  12  So.  723. 

103 


§  90  mOOBPOBATION  AND  0B0A8IZATI0N  OF 


ftATIONS.  [PABT  I. 


it  ia  not  necessary  that  resignations  of  directors  be  accepted  in 
order  to  become  effectiTC.^ 

Persons  owning  a  majority  of  stock  have  a  right  to  elect  direc- 
tors.2  It  is  a  fundamental  princij)le  in  corporation  law  that  a 
majority  of  stockholders  sliall  control  the  policy  and  regulate  the 
business  affairs  of  the  corporation,  and  to  this  each  stockholder 
impliedly  agrees  when  he  acquires  stock  in  the  corporation.' 
However,  in  order  to  insure  minority  representation  on  the  board, 
cumulative  voting  for  directors  is  permitted  in  a  large  number  of  the 
States.*  Where  such  right  to  cumulate  votes  is  mandatory  such 
right  cannot  be  taken  away  by  by^law.^ 

The  fact  that  a  corporation  beginS'  business  with  an  insuffi- 
dent  number  of  directors  does  not  invalidate  debts  contracted  by 
them,  nor  deprive  it  of  its  corporate  rights  and  privileges  unless 
some  action  is  taken  by  the  State  to  that  end.^  Failure  to  elect  a 
board  of  directors  annually  does  not  work  dissolution.  The  old 
board  will  hold  over  by  implication  of  lawj  This  is  a  rule  not 
only  established  by  statute  in  a  lai^  number  of  the  States,  but  is 
a  well  established  rule  of  corporation  law  in  the  absence  of  such 
statutes.^  In  the  election  of  directors  a  majority  vote  of  all  present 
is  sufficient,  provided  a  majority  of  the  stock  is  represented  at  the 
meeting.^  Vacancies  in  the  board  of  directors  cannot  be  filled 
by  the  remaining  directors,  but  must  be  filled  by  the  stockholders, 
unless  such  power  is  expressly  granted  by  statute.^^  Even  where 
the  riglit  to  fill  vacancies  is  given  to  the  remaining  directors  it  is 
probably  true  that  there  must  be  present  at  the  meeting  a  majority 
of  the  whole  number  of  directors  prescribed  by  the  charter,  and 
that  such  vacancy  be  filled  by  a  majority  vote  thereof.^ 

Unless  regulated  by  statute  or  by-laws,  the  board  of  directors 
may  fix  any  place  within  the  domiciliary  State  at  which  annual 

1  Pres.,  etc.  of  Manhattan  Co.  v.  Kal-         Hunter  v.  Compaoy,26  La.  Ann.  13. 
denberg,  165  N.  Y.  1  ;  58  N.  E.  790;       8  Chamberlain  v.  D.  S.  Works,  103 

Briggs  r.  SpauMinnr,  141  U.  S.  155.  Mich.  124  ;  61  N.  \V.  532  ;  Mosea  v.Tonip- 

*  Faulds  V.  Yates,  57  111.  416.  kins,  84  Ala.  613 ;  4  So.  763. 

»  Wheeler  v.  Company,  143  111.  197;  ^  Eggleston  v.  JJoolittle,  33  Conn.  402. 

32  N.  £.  420.  l»  Moses  v.  Tompkins,  84  Ala.  613 ;  4 

*  See  Put  m.  Table  9,  page  579.  So.  763 ;  Kearney  v.  Andrews,  10  N.  J. 
5  Tomlin  v.  Bank,  52  Mo.  A  p.  430;  Eq.  70. 

Wright  o.  ConqpMiy»  67  CaL  532;  8  Pac  Moses  v.  Tompkins,  84  Ala.  613  ;  4 

70.  So.  763  ;  Nathan  v.  Tompkins,  82  Ala. 

*  Fargasoa  v.  Company,  78  Miss.  65 ;  437 ;  2  Su.  747. 
27  So.  877. 

102  . 


CHIP,  in.]        OBGANIZATION  AFTER  INCOBPOEATION.  §  90 

meetings  for  the  election  of  directors  may  be  held.i  Where  there 
are  mandatory  provigion*  in  the  charter,  statute,  or  by-laws  as  to 
place  of  holding  annoal  meetings  these  must  be  followed.*  Where 
the  certificate  of  incorporation  is  required  to  fix  the  number  of 
directors,  such  number  cannot  be  changed  except  by  amendment 
thereof.^ 

In  connection  with  tlie  general  subject  of  election  of  directors  the 
(juestion  not  infrequently  arises  as  to  the  validity  of  the  so-called 
"  voting  trusts"  now  becoming  so  common  in  this  country.  The 

prevailing  and  it  is  believed  the  true  rule  on  this  subject  is  set 
forth  in  Clowes  v.  Miller,*  where  it  was  held  that  in  the  absence 
of  any  improper  motive  such  trusts  are  valid.s  It  is,  in  the  absence 
of  such  improper  motives,  merely  a  convenient  method  of  voting 
by  proxy. 

In  the  absence  of  statute,  charter  provision,  or  valid  by-law  to 
the  contrary,  holders  of  preferred  stock  have  the  same  rights  in  the 
election  of  directors  as  belong  to  the  holders  of  common  stock.^  It 
has  been  held  that  stockholders  may  in  voting  for  directors  change 
their  vote  while  the  election  is  in  progress.^  Mandamus  is  Ijie 
proper  remedy  to  compel  canvassing  of  votes  at  election  of  duec- 
tors  to  determine  whether  or  not  such  election  was  valid.* 

In  some  of  the  States  there  are  certain  statutory  officers  known 
as  "Inspectors  of  Election,"  who  must  be  chosen  preliminary  to 
the  election  of  tlie  board  of  directors.  These  inspectors  should  be 
chosen  in  the  mode  provided  in  the  by-laws.*  Inspectors  have  no 
power,  express  or  implied,  to  pass  upon  the  eligibility  of  directors.^ 
The  failure  to  have  the  inspectors  sworn  before  acting  as  such  will 
not  invalidate  an  election.ii       the  absence  of  statutory  provision 


1  Corbett  v.  Woodward,  5  Saw,  403; 
Commonwealth  v.  Smith,  45  Pa.  St  59 ; 
Frstt  V.  Company,  35  Conii.  365;  Dake 
9,  Taylor,  37  Fla.  64  ;  19  Sou.  172 ;  Hilles 
V.  Parish,  14  N.  J.  Eq.  380 ;  Arms  v.  Co- 
iiant,  36  Vt.  744 ;  Hodgson  v.  Company, 
46  Minn.  4.54  ;  49  N.  W.  197. 

2  McDauiel  v.  Company,  22  Vt.  274. 

s  See  Matter  of  Giittta  Iron  Co.,  63 
N.  J.  L;168  ;  41  Atl.  931. 

4  60  N.  J.  Eq  179  ;  47  Atl.  345. 

6  See  also  Faulds  v.  Yates,  57  111.  416; 
Moses  V.  Scott,  84  Ala.  608 ;  4  So.  742 : 
O.  &  M.  Ry.  Co.  V.  State,  49  O.  St.  668 ; 
32  N.  E.  933 ;  Mobile,  etc.  Ry.  Co.  v. 
Nicholas,  98  AU.  92 ;  12  So.  783. 


«  Mackintosh  v,  B.  B.  Co.,  32  Fed.  350; 
54  Fed.  582 ;  Lockhart  v.  Van  Alstyne, 
31  Mich.  76;  Miller  v.  Battennan,  47 

O.  St.  141 ;  24  N.  E.  496. 

7  State  V.  McGaius,  64  Mo.  Ap.  225. 

8  State  V.  McCains,  64  Mo.  A  p.  225. 

»  In  re  Excelsior  Fire  Ins.  Co.,  16  Abb. 
Pr.  8 ;  People  r.  Company,  55  Barb.  344 ; 
In  re  lightbaU  M^.  Co.,  47  Hun.  258; 
State  V.  Merchant,  37  O.  St.  251  ;  Com- 
monwealth V.  Woelper,  3  S.  &  R.  (Pa.)  29. 

13  In  re  St.  Lawrence  Steamboat  Co., 
44  N.  J.  L.  529. 

u  /«  re  M.  &  H.  By.  Co.,  19  Wend. 
(N.  Y.)  135. 


103 


§  92  INCOBPOfiAIION  AND  0B0ANI2iAXI0N  OF  CO&PORAXIOMS.  [PABT  I* 

or  regulation  by  by-laws  providing  otherwise,  the  power  to  a^Mint 
inspectors  oi  eleotioii  lies  with  the  sloddMd4eni  sloae.^ 

§  91.  Fowm:  to  hM  MettlaftB  for  tk»  Beotton  of  Direeton  with- 
out the  Domiciliary  State.  —  The  general  rule  unquestionably  is 
that  in  the  absence  of  statute  or  unanimous  consent  of  all  the 
stockholders  no  election  of  directors  by  the  stockholders  can  be 
legal,  so  as  to  make  them  direetm  dejwre^whmi  had  at  a  meetiiig 
called  withoat  ^  KaoHs  <tf  the  State  imder  whose  laws  the  cor- 
poration is  created.^ 

Twelve  of  the  Commonwealths  have  statutes  expressly  author- 
izing the  holding  of  stockholders'  meetings  without  the  domiciliary 
State.3  In  any  event,  it  aemna  to  be  now  w^l  settled  that  where 
all  the  stod^holdeni  meet  wi&oot  the  State  and  transact  bosi- 
ness  thereat,  even  though  such  business  be  the  annual  election  of 
directors,  tlie  stockholders  present  at  such  meeting  are  estopped 
to  question  the  validity  of  the  proceedings  had  thereat*  An  ex- 
cellent method  of  validating  any  action  taken  by  stockholders  at 
meetii^  held  without  1^  domiciliary  State  is  to  have  sabsequent 
aedoQ  taken  by  the  stockholders  at  a  meeting  called  within  the 
State  ratifying  what  has  been  previously  done  by  them  without 
the  State.    This,  it  has  been  held,  cures  all  previous  defects.^ 

§  92.  Voting  by  Proaisr-— -At  common  law,  voting  of  Stock- 
holders at  annual  meetiiq^  or  fecial  meetings  was  required  to  be 
done  in  person.*  Jn  the  absence  of  statute,  charter  provision,  or 
valid  by-law  giving  stockholders  this  right,  the  same  rule  would 
apply  at  the  present  day.^  ^ 

1  State  y.  Merchant,  37  O.  St.  251.  11  Wall.  459;  20  Law  Ed.  199.  The 

2  Hardin<^  v.  American  Glucose  Co.,  principle  of  estoppel  may  be  applied  here. 
182  HI.  551 ;  55  N.  E.  577.  See  Hodgson  Handley  v.  Statz,  139  U.  S.  417;  11  Sap. 
V.  Company,  46  Minn.  454 ;  49  N.  W.  197 ;  Ct.  5-30. 

Wntmm  v.  Company,  38  Me.  343 ;  Saiftli  •  8«e  Ptot  IIL  T»Me  11,  page  581. 

V.  «hwr  Valley  Min.  Co.,  64  Md.  85;  20  «  T. M.  Ca v. Goodbae,  18 N. Car.  Ml; 

Atl.  1032;  Aspinwall  et  al.  v.  Ohio  &  Handley  v.  Stati,  189  U.S. 417;  11  Ssp. 

M.  R.  R.  Co.,  20  Ind.  492 ;  W.  H.  &  H.  Ct.  530. 

Mining  Co.  v.  King,  45  Ga.  34  ;  Hiles  v.  ^  G.  I.  &  E.  Co.  v.  Toler,  80  Md.  278; 

Parrish,  24  N.  J.  Eq.  380 ;  Arms  v.  Con-  30  Atl.  657. 

Bant,  36  Yt.  750;  Bellows  n,  Todd,  39  *  Perry  v.  Company,  93  Ala.  364;  9 

J/omm,  9»;  FnnMo-Tozaa  Land  Co.  v.  So.  Hep.  217. 

Lai^  59  Tex.  339 ;  Mack  r.  De  Baidelr  ?  PbillipB  v.  Wickham,  1  F»ge  (K.  T.), 

ben,  etc.  Co.,  90  Ala.  396  ;  8  So.  150;  590;  Taylor  v.  Griswold,  14  N.  J.  L.  222; 

Dake  v.  Taylor,  37  Fla.  64  ;  19  So.  172;  P.  H.  S.  Bank  v.  Superior  Court,  104  Cal. 

Camp  V,  Byrne,  41  Mo.  525 ;  Mitchell  v.  649 ;  38  Pac.  452  ;  State  i\  Tudor,  5  Day, 

Vt.  Copper  Min.  Co.,  40  N.  Y.  Sup.  Ct.  329  ;  People  v.  Crossley,  69  111.  195;  Perry 

406 ;  GalTestoii,  ete.  By.  Co.  n.  Cknidrey,  v.  Company,  93  Ala.  864  ;  9  So.  217. 
10* 


CHAP,  ni.]         OBOANIZATION  AFIEB  INCOBPOBAHON.  §  93 

Owing  to  the  aaqiiestioned  right  of  a  corporation  to  adopt  a 
valid  by-law  permitting  voting  by  proxy,  even  in  the  absence  of 
a  statute  authorizing  it,  the  question  has  ceased  to  be  one  of  any 
great  practical  importance  in  the  country  to-day.  Besides  this, 
statutes  exist  in  all  of  the  States  and  Territories,  except  Ari- 
zona and  Georgia,  expressly  authorizing  the  voting  of  stock  by 
proxy.  It  should  be  observed,  however,  that  where  the  right  to 
vote  by  proxy  is  given  by  slatnte  witliont  restriction  it  cannot  be 
qualified  by  by-law.^ 

Proxies  may  be  issued  in  blank  and  lawfully  filled  in  by  the 
holder.2  It  has  been  held  that  stockholders  cannot  give  an 
irrevocable  proxy  to  secure  the  payment  of  a  debt^  It  is  agunst 
the  settled  rales  governing  the  control  of  corporations  that  an 
irrevocable  power  of  attorney  which  directs  the  vote  on  stock, 
should  be  vested  in  a  person  who  lias  no  interest  in  the  stock  or 
is  not  a  representative  of  a  person  interested  therein.^ 

The  foregoing  suggests  the  question  as  to  whether  or  not 
voting  trusts,  so  common  at  the  present  time,  are  valid.  A 
**  voting  trast "  may  be  defined  to  be  an  agreement  of  stock- 
holders to  give  any  designated  trustee  the  right  to  vote  at  his 
discretion  through  stockholders  for  a  given  period  of  time.  It 
may  be  said  that  such  voting  trust  is  valid  where  neither  the 
purposes  nor  tiie  means  used  contravene  any  constitutional  or 
statutory  provision  or  well-recognized  principles  of  public  policy, 
and  are  within  the  scope  of  the  powers  of  the  contracting 
p^rties.^ 

§  93.  Pirat  Directora'  Meeting. — The  principal  business  tO  be 

tnmsacted  at  the  first  meeting  of  the  board  of  directors  of  a  cor- 
poration is  (1)  the  election  of  the  officers  provided  for  in  the 
by-laws;  (2)  the  carrying  into  effect  the  resolutions  passed  at 

the  organization  meeting  of  the  stockholders,  if  any,  looking  to 
the  payment  of  the  stock  in  property,  or,  in  lieu  thereof,  the 

1  Bank  «.Snperior  Gout,  104  GaL  649;  KiM  v.  ButOling  Ca,  61  N.  J.  Eq.  5 ; 

38  Pac.  452.  47  Atl.  471 ;  Brightman  v.  Bates,  175  Mass. 

2  Matter  of  White,  45  Hun,  580;  105;  55  N.  E.  809;  Moses  v.  Scott,  84 
Matter  of  Townsend,  46  N.  Y.  St.  Rep.  Ala.  608 ;  4  So.  742  ;  Clowes  v.  Miller,  60 
135.  N.  J.  Eq.  179;  47  Atl.  345 ;  SuUivau  v. 

•  Matter  of  Germicide  Co.,  65  Han,  Parkes  (N.  Y.),  69  Ap.  Dir.  221 ;  74  N.T. 

606 ;  SO  N.  Y.  Sap.  495.  ^np^  786 ;  Freon  v.  Gompanj,  42  O.  St. 

^  Clowes  V.  MSOiu,  60  N.  X  Bq.  179 ;  90.   See  however  Shepaug  Voting  Trust 

47  Atl.  345.  Case,  60  Conn.  553  ;  24  Atl.  32 ;  Harvey 

6  M.  &  O.  R.  y.  Nichols,  98  Ala.  92  ;  12  r.  Company,  118  N.  C.  693  ;  24  S.  E. 

8a  723 ;  Smith  v.  Company,  115  CaL  584  ;  489. 

105 


§  08  INCOEPOBATION  AMJ>  CmAmATlOK  OF  OCNUraUfiaNS.  [PAflf  I. 


passage  af  a  resolution  hy  the  board  of  direetors  ordering  an 
assessment,  eitiier  in  whcAe  or  in  part,  upon  the  par  value  of  the 
capital  stock.  Tlie  general  rule  appeara  to  be  tliat  unless  the 
governing  statute  or  a  bj'-law  of  the  corporation  cx])ressly  provides 
that  directors'  meetings  should  be  held  within  the  domiciliary 
State,  that  such  meetii^  may  be  held  without  the  limits  of  such 
State  if  desired.^ 

Some  courts,  however,  apparently  distinguish  in  this  regard 
between  meetings  of  the  board  of  directors  for  the  election  of 
olTicers  and  those  meetings  merely  called  for  the  transaction  of 
routine  business.  Such  courts  hold  that  meetings  of  the  first 
class  must  be  held  within  the  diwiidliaij  State,  while  the  others 
may  be  held  without  such  State  if  desired.^  In  nearly  half  of  the 
States  statutes  exist  authorizing  the  holding  of  directors'  meet- 
ings without  the  State.^  It  is  unquestionably  true  that  where  in- 
corporators can  perform  constituent  acts  outside  of  the  domiciliary 
State  directors  can  elect  officers  in  like  manner.* 

When  calling  the  directms  together  for  tlieir -first  meeting,  the 
mode  of  notice  provided  for  in  the  by-laws  must  be  given.  In 
the  absence  thereof  personal  notice  must  be  given,  or  a  waiver  of 
uotice  must  be  had  from  eacli  of  the  directors.^  It  is  hardly 
necessary  to  state  in  this  connection  that  no  director  can  lawfully 
delate  power  to  act  for  him  to  another  person.* 

At  common  law  a  majority  of  the  directors  present  and  voting 
at  a  meeting  was  necessary  to  constitute  a  quorum  of  the  full 
board  J  In  some  few  of  the  States,  notably  Oregon,  statutory 
provisions  exist  permitting  less  than  a  majority  of  the  board  of 
directors  to  constitute  a  quorum.  Provisions  in  statutes  and  by- 
laws requiring  the  dection  of  directors  to  be  hdd  on  a  specified 
date  are  ordinarily  construed  to  be  merely  directory.^  The 
general  rule  is  that  a  majority  of  the  directors  constitute  a  quorum 

1  Thompson  v.  Compan}-,  58  Miss.  423  ;       ^  Bank  r.  McCarthy,  55  Ark.  473 ;  18 

Lead  Co.  v.  Reinhard,  114  Mo.  218;  21  S.  W.  759  ;  B.  B.  R.  Co.  v.  Buck,  68  Me. 

S.  W. 488;  Bassett  {.'.Mining  Co.,  15  Nev.  81;  Library  v.  Association,  173  Fa.  St. 

293;  FtesoDS  v.  Lent,  34  N.  J.  £q.  67;  30;  33  Atl.  744. 

Haaaa  v.  Company,  aS  O.  St.  fll.  *  Peny  r.  Companv,  93  Ala.  364 ;  9 

s  Smith  V.  Minuig  Co,  64  M d.  85 ;  20  80.  217 ;  Ciaig  Medidne  Cd.  r.  Mer- 

Atl.  1032  ;  G.  1.  &  S.  Co.  V.  Tofer,80  Md.  chants'  Bai^  M  H«b,  661 ;  14  H.  T. 

278  ;  30  Atl.  651.  Sup.  16. 

3  See  Part  III.  Table  12,  pa.!?e  582  ^  Blackwell  v.  State,  36  Ark.  178. 

*  Ohio,  etc  R.  B.  Co.  v.  Mcrherson,  35       »  Beardsley  v.  Johnson,  121  N.  Y.  224 ; 

Mo.  13.  24  N.  £.  380.  ' 

106 


CHAP.  IH.]        OliGANIZATIOH  AFTBB  INCORPORATION. 


§95 


for  the  transaction  of  business,  and  a  majority  of  the  quorum  have 

power  to  bind  the  corporation  by  their  votes.^ 

§  94.  Election  of  Corporate  Officers.  —  111  nearly  all  of  the  States 
Statutes  exist  designating  certain  officers  that  business  corporations 
must  have,  and  providing  that  such  officers  shall  be  elected  by 
the  board  of  directors  duly  convened  for  that  purpose.  Where, 
however,  as  is  sometimes  the  case,  this  power  is  devolved  upon  the 
stockholders  by  statute,  then  directors  have  no  power  to  elect  such 
officers.2  In  the  absence  of  such  statutes  as  are  here  referred  to, 
giving  the  du-ectors  power  to  elect  officers,  it  must  be  admitted 
that  the  current  of  authority  is  to  the  effect  that  the  power  then 
hes  in  the  stockholders  alone.* 

The  law  implies  that  directors  shall  hold  their  office  until  their 
successors  have  been  elected  and  qualified.^  Where  vacancies 
occur  in  the  boai-d  of  directors  they  must  be  filled,  in  the  absence 
of  statute,  charter  provision,  or  by-law  giving  the  power  to  the 
directors,  by  the  stockholders  only,  and  even  where  the  power  to 
fill  vacancies  is  lawfully  bestowed  upon  the  remaining  directors, 
vacancies  can  then  be  filled  only  by  action  of  a  majority  of  the 
aiithorized  number  of  directors.^ 

Questions  of  policy,  or  mani^ement,  or  expediency  of  contract  or 
actiou,or  consideration  of  gross  misappropriation  or  unlawful  appro- 
priation of  corporate  funds  to  the  detriment  of  corporate  interests, 
are  left  generally  to  the  decision  of  the  directors  if  their  powers 
are  without  limitation  and  free  from  restraint.  To  licld  otherwise 
would  be  to  substitute  the  judgment  and  discretion  of  others  m 
place  of  those  determined  on  by  the  scheme  of  incorporation-^ 

§  95.  Appointment  of  ^raoiitfY«  Committ»«.  —  The  incorpora- 
tion acts  of  Connecticut,  Delaware,  Massachusetts,  Nevada,  New 
Jersey,  North  Carolina,  Virginia,  and  West  Virginia  all  authorize 
the  appomtment  by  the  board  of  directors  from  their  own  number 
of  an  executive  committee  to  whom  may  be  entrusted  most  of  the 
ordinary  duties  that  devolve  upon  the  full  board  of  directors. 

1  Ten  Eyck  v.  Companv,  74  Mich.  226 ;  *  People  v.  Rankle,  9  Johnson  (N.  Y.), 
41  N.  W.  905 ;  see  alao  Hoyt  v.  Thompson,    147  ;  Huguenot  Nat.  Bank  v.  StadweU,  6 

19  N.  Y.  207.  ^^^y 

2  See  In  re  St.  Helen  MiU  Co.,  13  Saw.       *  Moses  v.  Tompkiiis,  S4  AIm.  SIS ;  4. 

92 ;  Walsenberg  Water  Co.  r.  Moore,  5  Son.  763.  t 
CoL  App.  144;  88  Pac  60.  '  EUerman      Ry.  Co..  49  N.  J.  Eq^ 

«  B^Tdsley  r. Johnson,  121  N.  Y.224;  24  217  ;  23  Atl.  287  ;  Llmer  t;.  Company,  98 

N.  E.  380 ;  In  re  A.  A.  G.  Iron  Co.,  63  N.  J.  Me.  579 ;  57  Atl.  1001. 
Law,  168, 357 ;  41  AO.  931 ;  46  AU.  1097. 


§  96  INCOBPOBATION  AND  OBGANIZATIOH  OF  attPQRATI01f&  [PASTL 

It  was  at  one  time  held  that  the  performance  of  any  duties  by  the 
board  of  directors  inrolving  the  exercise  of  discretion  and  judg- 
ment  could  not  be  so  delegated.^  The  modern  rule,  even  in  the 
absence  of  statute,  is  that  directors  have  the  power  to  delegate  to 
a  part  of  their  own  number  authority  to  perform  any  part  of  the 
ordinary  business  of  the  corporation,  eren  though  it  involves  the 
exercise  of  the  broadest  judgment  and  discretion  ^ 

In  any  event,  whenever  a  question  is  raised  as  to  the  validity  of 
acts  done  by  an  executive  committee,  the  ratification  of  their  action 
by  the  full  board  will  undoubtedly  correct  all  defects  in  the  act 
complained  of  which  would  have  been  valid  in  the  first  instance  if 
performed  by  the  board  itsdfj^ 

§  96.  BMt  AMflMomta.  — Where  the  capital  stock  of  a  cor- 
poration is  not  aU  issued  in  the  first  instance  in  exchange  for 
property,  it  is  customary  for  the  board  of  directors  to  pass  a  reso- 
lution at  their  first  meeting,  making  an  assessment  upon  the  stock 
of  stockholders  either  for  its  entire  par  value  or  some  fractional 
part  therecrf.  GeneraUy  speaking,  in  order  to  sustain  a  right  of 
action  on  stock  subscriptions,  it  is  necessary  to  show  that  a  valid 
call  or  assessment  has  been  made.*  An  assessment  is  a  rating 
or  fixing  of  the  proportion  by  the  board  of  directors  or  by  the 
stockholders,  which  every  subscriber  is  to  pay  of  his  subscrip- 
tion, of  which  notice  is  given,  which  notice  ia  referred  to  as  a 
"call."  6 

While  it  is  doubtless  true  that  a  call "  may  be  made  either  by 
the  directors  or  the  stockholders,  nevertheless  it  is  usually  made 
by  the  directors.  This  of  course  necessitates  the  organization  of 
the  corporati<m  as  a  preliminary  to  the  making  of  a  valid  assess- 
ment.*  The  purpose  of  the  "call''  is  to  fix  the  time  for  pay- 
ment where  that  is  not  provided  for  either  by  statute,  charter 
provisions,  or  by-law.^    The  better  rule  seems  to  be  that  tiie 

2  M  "I'  ''-J?*^'     ^'  ^  *  Chandler  v.  Siddle,  5  Fed.  Cases  No 

2  Hoyt  V.  Thompson,  etc.,  19  N.  Y.  207 ;    2594 ;  3  DiUon,  477 

E.  n,  Jones  v.  Wilhams,  139  Mo.  1  ;  6  Williams  v.  Taylor,  120  N  Y  2U- 
40  8.  W.  S«3 ;  Davis  v.  Company,  2  Utah,  24  N.  E.  288  ;  Williams  ».  Comnuiy.  153 
74 ;  Tempd  v.  Dodge,  89  Texas,  69 ;  32   Ind.  496 ;  55  N.  E.  425. 

T  ^  ^^Voh^       '  Went  V,  Crawford,  80  Cal.  19 ;  21 

Telephone  Co.  v.  Company,  44  N.  J.  Eq.  P)m.  1IS8;  W.  8.  Bank  v.  Btiak  107  Mo 
568 ;  14  Atl.  907 ;  Sheridan  Electric  Light    133 ;  17  S.  W.  644 ;  Cham|«cm  C  ffi^ 

/tt^"^^  ^'l     ^  ^^"^ '  Co.  «»•  BMi^  74  MoTaii.  587. 

«  U.  P.  Ry.  Co.  i;.  Company,  163  U.  &  -> 

M4;16&Ctll73. 
108 


CHAP.  III.]        OBGANIZATION  AFTER  INCORPORATION. 


§97 


directors  have  implied  power  by  virtue  of  their  office  to  make 
assessments.^ 

In  any  event,  shareholders  may  delegate  such  power  to  the 
directors'when  the  same  is  given  to  them  by  statate  or  by-law.^ 

It  is  questionable,  however,  whether  the  directors  have  power  in 
their  turn  to  delegate  the  power  of  making  assessments  to  some 
ministerial  officer.^  In  the  making  of  assessments  the  utmost  care 
should  be  obs^ved  to  see  that  all  the  statutory  requirements  rela- 
tive to  the  same  are  complied  with. 

§  97.  Certificates  required  to  be  made  by  Offioen  or  INrootora 
after  Organization.  —  In  Maine,  Massachusetts,  Arkansas,  and 
Indiana  the  statutes  require  that  the  board  of  directors  together 
with  certain  of  the  corporate  officers  shall  file  a  certificate  of 
organization  with  certain  officers.  Ordinarily  the  failure  to  file 
such  certificate  would  not  affect  the  legal  character  <rf  the  cor- 
poration unless  there  was  a  statutory  provision  to  that  effect* 
in  Illinois,  Missouri,  Tennessee,  and  Utah  a  certificate  of  due 
oirganization  is  issued  to  the  corporation  by  State  officials.^ 

In  New  York,  New  Jersey,  District  of  Goluml»a,,  Nevada, 
Indiana,  Massachusetts,  North  Carolina,  and  Colorado  the  law 
requires  that  after  the  payment,  either  in  whole  or  in  part,  of  the 
capital  stock  a  certificate  shall  be  made  and  filed  in  the  proper 
State  office  setting  forth  the  facts  relative  to  such  payment.* 
In  some  of  the  States,  notably  New  Jersey,  failure  to  file  such 
certificate  renders  the  officers  neglecting  or  refusing  to  make 
such  certificate  for  thirty  days  after  written  request  so  to  do, 
jointly  and  severally  liable  for  all  debts  contracted  before  the  filing 
of  such  certificate.^ 

Unless  there  is  a  penalty  provided,  such  provisioDS  are  mmly 
directory.' 

1  Bodd  V.  Company.  15  Ora.  418 ;  15      *  Alao  in  Delaware  npon  feqaail  ef  a 
Pae.  659;  Smilli  r.  Oooipanj,  1  How.  creditor  or  stockholder. 
(MiM.)  479.  ^  Nassau  Bank  v.  Brown,  30  N.  J.  Eq. 

a  Rives  v.  Company,  30  Ala.  92.  478;  Waters  v.  Quinby,  27  N.  J.  L.  296. 

8  Pike  y  Company,  68  Me.  445 ;  S.  H.  See  S.  F.  N.  Bank  v,  Almy,  117  Mass.  476 ; 
Road  V.  Green,  1 2  R.'  1. 164.  Chase*!  Pat  EL  Co.  v.  Company,  1 52  Man. 

4  /n  re  Shakopee,  ete.  Co.,  87  Mian.  428;  iS  N.  £.  800;  Chaae  v.  Lord,  77 
91;  88  N.  W.  219;  FianWin  Bridge  Co.  N.  Y.  1 ;  Block  v.  Womer,  100  HI.  328; 
V.  Wood,  14  Ga.  80;  In  re  Philadelphia  Hardman  v.  Sage,  124  N.  Y.  25 ;  26  N.  E. 
Artisans  Institute,  8  Phila.  229  ;  A.  S.  A.  354;  Flash  v.  Conn,  16  Fla.  428  ;  Aai|^ 
&  G.  Co.  V.  Whittier,  117  Mass.  451.  v.  Berlin,  13  Col.  200 ;  22  Pac.  433. 

•  See  Boston  Acid  Mfg.  Co.  u.  Me-      •  Veeder  v.  Undgett,  95  N.  Y.  295 
ring,  15  Gray  (Mass.),  251. 

109 


g  99  IKCOBPOBATION  AND  OBGANIZATION  OF  CORPORATIONS  [PABT  I. 

§  98.  Time  in  which  Corporation  must  organize  and  commence 
BuBlneM.  — Over  half  of  the  States  have  provisions  upon  their 
statute  books  requiring  corporations  to  organize  and  commence 
business  within  from  one  to  fiye  years  after  the  issuance  of  their 
diarter.i  Usually  the  praaltyfor  failure  to  so  organize  and  com- 
mence business  is  the  right  given  to  the  State  to  bring  proceed- 
ings for  the  forfeiture  of  the  corporation's  charter  on  the  ground 
of  non-user  thereof  during  the  statutory  period.  It  is  undoubtedly 
true,  however,  that  as  against  all  but  the  State  failure  to  organize 
and  conunence  business  .within  the  time  limited  by  statute  will  not 
preTent  it  hmn  becoming  a  corporation  de  facto? 

§  99.  stock  CSwtificatea.  —  Stock  certificates  are  the  muniments 
and  evidence  of  the  holder's  title  to  a  given  share  in  the  property 
and  franchises  of  the  corporation  in  which  he  is  a  member.* 
Subscribers  to  the  capital  stock  upon  complying  with  tiie  terms  of 
their  subscription  are  enMtled  to  certificates  of  stock  showing  the 
number  of  shares  owned  by  them.  These  certificates  must  be 
signed  by  the  officers  designated  for  that  purpose  by  statute  or,  in 
the  absence  of  statutory  provision,  by  such  officers  as  are  desig- 
nated in  the  by-laws  for  that  purpose  *  A  seal  is  not  necessary 
to  the  validity  <^  a  corporation  of  stock  in  a  corporation  (although 
it  is  customary  to  affix  cme),  and  this,  too,  even  in  the  presence  "of 
statutory  requirements.^  Neither  is  it  necessary  to  the  validity  of 
a  stock  certificate  that  it  should  be  issued  in  the. State  of  the  cor- 
poration's domicile.6  Generally  speaking,  however,  the  stock  cer- 
tificate  book^seal,  and  stock  transfer  books  must  be  kept  within 
the  State  unleBS  the  statute  provides  otherwise  J 

Statutory  provisions  exist  in  nearly  all  the  States  providing  the 
minimum  and  maximum  par  value  of  shares  of  capital  stock/  In 
some  few  States  the  statute  expressly  provides  that  all  the  stock 
certificates  issued  by  a  corporal  shaU  be  of  a  uniform  par  value. 
Even  in  the  absence  erf  snch  a  mandatory  provision,  it  is  at  least 

*  ?~  Jiw*  ™  Table  11,  page  581 ;       *  N.  0.  &  T.  P.  Co.  «.  Bank  (Ohio)  04 
see  also  People  v.  By.  Ca,  45  CaL  SOS;  Wk.  Law  BnL  198;  Titat  »  G  W  T 
Commonwealth  v.  Wain  Co^  110  ftt  St.  Road,  61  N.  Y.  S87. 

391 ;  2  Atl.  63.  6  Fitzhugh y. Bank, 3  Monroe (Ky.),12«; 

*  Lehman  v.  Warner,  61  Ala.  455;  S.  Halsted  v.  Dodge,  1  How.  Pr.  (N.  Y.)  170. 
L.  A.  &  T.  H.  Ry.  Co.  v.  Company,  158  «  Courtright  v.  Deeds,  37  la  503 
in.890;  41  N.B.  916;  County  of  Macon  7  Perkins  v.  Lyons.  Ill  la.  192-  82  • 
».  Shores,  97  U.  a  J79.  K.W.486.                      ^  i^i^,  w 

J  MeelittteBniff.  Cmasiuif,  18H.  T.      •  8m  Bwt  HL  TWtle  6,  page  576. 
699. 

110  ' 


CHAP.  III.]        OBGANIZATION  AFTEB  IMCOBPOBATIOW. 


§99 


questionable  whether  the  courts  would  sustain  the  issuance  of 
stock  certificates  of  more  than  one  designated  par  value.i  In  the 
absence  of  statute  prohibiting  the  same,  corporations  may  insert 
in  stock  certificates  such  stipulations  as  they  choose  relative  to  the 
riMits  of  the  holders  of  such  certificates,  and  these  constitute 
valid  contracts  between  the  stockholders  and  the  corporation. 

i  See  In  re  Cre«o».  Blrilding  A-'n.  I   p»y,  1»  (P^)  St  Atl.  4U  ,  Del* 

Legal  Register  (Pa.).  177.  AttomMning  ••I'l  * 
rf^  Xi, m»  cSmmcmw-Wi .. Om.      « Co. v. Brockett, 58 111. Ap. 204. 


V 


111 


i 


§100  WOWIPOBATIOlf  AH©  ORGANIZATION  OP  COBPOBATIONS.  [PABTI. 


CHAPTER  IV. 

ISSUANCE  AND  PAYKEasiT  OP  CAPITAL  fflOOK. 

§  100.  General  Remarks  as  to  tba  Isaoaiioe  and  Pmjmmt  of  Cmp^ 
ital  Stock  upon  tho  OiBMiiH^  of  a  Coipofatlim. — In  connec- 
tion with  the  issaaDce  and  payment  of  capital  stock  following 
Reorganization  of  a  corporation,  several  important  matters  should 
be  considered,  such,  for  example,  as  the  time  within  which  the  cap- 
ital  must  be  paid  in ;  the  question  as  to  how  the  capital  most  be 
paid  in  with  reference  to  whether  in  cuOi,  in  property,  or  in  ser^ 
vices ;  and,  hnaUj,  conaidera^cMi  of  the  safest  and  most  convenient 
method  to  be  adopted     tiie  corporation  so  that  it  can  sell  a  por- 
tion  of  its  capital  stock  at  less  than  par,  if  necessary,  for  the 
procurmg  of  working  capital  for  the  corporation ;  and  this,  too, 
without  subjecting  the  purchasers  of  such  stock  to  any  liability  to 
creditors  for  aU^ed  unpaid  stock  subscriptions  thereon. 

It  appears  that  in  certain  of  the  States,  notably  South  Dakota 
and  T^essee,  it  is  not  necessary  that  any  of  the  capital  stock 
be  cither  subscribed  or  paid  in,  in  order  that  the  corporation 
may  transact  business.^   In  the  several  States- provisions  of  the 
several  incorporation  acts  in  fme  tiierein  differ  greatly  in  regard 
to  the  matter  of  the  time  within  which  capital  stock  must  be  paid 
m.   New  York  requires  that  half  of  the  authorized  capital  be 
paid  m  within  one  year ;  Missouri,  fifty  per  cent  thereof  immedi- 
ately  ;  Maryland,  one-fourth  of  the  capital  must  be  paid  in  each 
year;  in  Indiana,  manufacturing corporaMons  must pav  in aU their 
capital  within  eighteen  months.   Twenty  of  the  States  require  a 
certain  percentage  of  the  capital  to  be  paid  in,  in  order  to  com- 
mence  business ;  while  in  twenty-five  a  certain  percentage  of  the 
authorized  capital  must  be  8ubscribed.2   As  a  general  rule  the 
effect  of  the  provisions  of  law  here  referred  to  when  they  are  not 
compUed  with  has  been  held  not  to  affect  the  existence  of  a  cor- 
powMon  as  a  oorpmtion  dejure,  but  merely  afford  ground  for  a 


1  See  ante,  1 2. 

112 


*  SMFtetllL  lUde  6,  page  576. 


CHAP.  IV.]    ISSUAfiOfi  ANI)  PAYMENT  OF  CAPITAL  STOCK.  §  101 

judgment  of  ouster  in  a  proper  action  brought  by  the  State  iwt 
that  purpose."^ 

Sometimes  the  statutes  go  further  and  require  certificates  as  to 
the  payment  of  the  capital  stock  to  be  filed  in  designated  offices.* 

§  101.  Manner  of  Payment  of  Capital  Stock.  —  Probably  no  sub- 
ject of  corporation  law  is  more  involved  in  apparently  hopeless 
confudon  than  that  growing  out  of  ^e  question  of  the  payment  of 
capital  stock  of  corporations  where  the  rights  not  only  of  stock- 
holders, but  creditors  as  well,  are  involved.  Frequent  attempts 
have  been  made  from  time  to  time  by  both  State  legislatures  and 
the  courts  looking  to  the  enactment  or  declaration  of  rules  which 
will  remove  the  question  from  its  present  vague  and  unsatisfactory 
form  into  the  realm  of  certainty  and  security.  It  may  not  be 
without  its  practical  value  to  trace  here  the  sporadic  development 
of  the  various  doctrines  that  have  been  advanced  from  time  to 
time  relative  to  both  how  the  capital  stock  of  a  corporation  may 
be  paid  in,  imd  when  so  paid  in  whether  the  valuation  placed  upon 
the  property  accepted  by  the  corporation  in  exchange  for  stod^, 
shall  be  conclusive  alike  upon  stockholders  and  creditors.  The 
common  law  rule  with  reference  to  the  manner  of  payment  of  the 
capital  stock  of  a  corporation  appears  to  have  been  from  time  im- 
memorial that  it  must  have  been  paid  for  either  in  money  or 
money's  worth.*  In  this  country  snch  a  rule  seems  to  have  ob- 
tained at  an  early  date.  Even  when  required,  by  constitutional 
provision  or  statute,  that  stock  should  be  paid  for  in  cash,  never- 
theless the  courts  early  adopted  the  view  that  the  same  might  be 
paid  for  in  money  or  money's  worth.  Otherwise  it  would  simply 
put  the  corporation  to  the  necessity  of  issuing  stock  in  the  first 
instance  for  money,  and  then  ordering  it  to  be  immediately  paid 
out  for  necessary  labor,  property,  or  services  * 

The  next  step  in  order  of  development  was  the  enactment  of 
either  constitutional  or  statutory  provisions  exi»ressly  authorizing 

1  Baker  v.  Backus,  32  111.  79  ;  Far-       2  gee  Quinby  v.  Waters,  28  N.  J.  L. 

gason  V.  Company,  78  Miss.  65 ;  27  So.  533.    See  ante,  sec.  97. 
877 ;  Hammond  v.  Strauss,  53  Md.  1  ;       ^  Drummond's  Case,  L.  B.  4  Chan. 

People  o.  Chftmbezs,  4S  Cai  201 ;  People  Ap.  772. 

o.  Bank,  7  Col  226  ;  3  Pac  214;  Pidmer      «  liebe  r.  Knapp,  79  Mo.  92 ;  Camden 

V.  Lawrence,  3  Sandf.  N.  Y.  161 ;  Lake  v.  Stuart,  144  U.  S.  104 ;  12  S.  Ct.  58S ; 

Ontario,  etc.  E.  Co.  v.  Mason,  16  N.  Y.  Kronert  v.  JohoafeOD,  19  Wash.  96;  St 

451  ;  Spartenburg,  etc.  R.  Co.  v.  Ezell,  Pac.  605. 
14  S.  C.  281  ;  State  ex  rel.  i?.  Webb,  97 
Ala.  Ill;  12  So.  377. 


§  101  mOOBFOBATION  AMD  OBOAMIZATION  OF  CORPORATIONS.  [PABT  I. 

the  payment  of  stock  of  corporations  in  money,  property,  or 
services.  Later  came  a  wave  of  constitutional  enactments  mainly 
confined  to  the  Western  States,  to  the  effect  that  no  corporation 
should  issoe  stock  except  for  money,  labor  done,  or  property  act- 
nallj  received,  and  declaring  that  all  fictitious  increase  of  stock 
should  be  void."  In  early  times,  when  the  number  of  corporations 
formed  were  few  in  number,  and  their  charters  limited  to  a  few 
purposes,  the  courts  were  seldom  called  upon  to  determine  whether 
or  not  capital  stock  had  been  actually  paid  in  in  accordance  with 
law, — this  for  the  reason  that  in  most  cases  the  mode  of  payment 
of  such  stock  had  been  in  cash.  However,  early  in  the  nineteenth 
century  the  question  became  a  vital  one  through  the  not  infrequent 
attempts  on  the  part  of  certain  corporations  to  pay  for  their  stock 
in  property  taken  at  a  valuation  which  in  the  opinion  of  many 
was  hxgAj  fictitioiis  if  not  tendolent  When  snch  corporations 
became  insolvent,  creditors,  and  sometimes  before  that  time  stock- 
holders, brought  the  question  in  its  practical  form  before  the 
courts  as  to  whether  such  valuation  were  binding  not  only  upon 
the  corporation,  but  upon  its  creditors  as  well.  It  was  such  a 
case  which  led  Justice  Joseph  Stcny  in  1S24  to  give  utterance  to 
tiie  famous  ^  trust  fond  doctrine"  to  the  effect  that' the  capital 
stock  of  a  corporation  is  to  be  regarded  at  all  times  as  a  fund  held 
in  trust  by  the  corporation  for  the  benefit  of  its  creditors.^ 

In  its  practical  application  the  trust  fund  doctrine  was  found  to 
be  an  inatnunent  of  injostlce  rather  than  of  justice.  Besides  this 
it  had  nef«r  received  the  sanetioii  of  the  common  law,  as  it  existed 
in  England  before  the  Revolution,  and  had  not  in  its  last  analysis 
any  right  to  demand  recognition  on  the  broad  basis  laid  down  for 
it  by  its  founder.  By  degrees  the  majority  of  the  courts  refused  to 
recognize  the  trust  fund  doctrine,  at  least  in  its  original  form,  and 
declared  upon  the  only  sale  ground,  which  was  that  stockholders 
should  only  be  held  liable  to  creditors  on  stock  issued  in  exchange 
for  property,  upon  the  ground  of  fraud.*-^  At  the  same  time  the 
courts  divided  upon  the  question  whether  in  the  appraisal  of 
property  taken  in  exchange  for  capital  stock  corporations  should 
be  required  to  appraise  snch  property  at  its  true  value  wi^out 
n^jard  to  ^be  iiiteii^oii  of  the  parties  upon  whom  the  duty  d 

^  8mWmd9.Ihatmm,9Umotk,a06;  *  See opudon  of  Joitiee  Wb.  Mildien 
led.  Gnet  Now  17944.  in  Hospes  v.  Compttiy,  48  Ukm.  174; 

SON.  W.  1117. 

114 


CHAP.  IV.]    ISBUAHCB  AND  PAYMENT  OP  CAPITAL  STOCK.         §  101 


making  such  appraisal  was  imposed,  or  whether  they  should  treat 
all  49uch  appraisals  as  conclusive  upon  both  the  corporation  and 
creditors  when  made  in  good  faith  and  where  no  actual  fraud 
appeared  in  the  transaction.  At  this  time,  too,  the  courts  almost 
universally  decided  to  distinguish  in  this  regard  between  the 
rights  of  thejcorporation  and  its  stockholders  on  the  one  liand  and 
the  rights  of  creditors  on  the  other.  Such  a  distiu<Mion  as  is 
here  referred  to  was  evidenced  by  the  adoption  of  the  rule  now 
recognized  everywhere  that  a  valuation  placed  upon  stock  by  the 
corporation  may  be  valid  and  binding  upon  the  corporation  and  its 
stockholdeirs  and  yet  not  conclusive  as  against  creditors.^ 

The  doctrine  here  referred  to  is  well  stated  by  Judge  Showalter 
in  a  Federal  case  as  follows :  * 

Whatsoever  may  have  been  in  fact  the  value  of  the  property 
turned  over  to  the  company  for  its  stock,  the  latter  agreed  to  take  it 
for  the  stock.  The  persons  interested  were  the  stockholders,  and 
there  was  no  dissent  on  the  part  of  any  person  concerned  in  what  was 
thus  done.  Neither  any  person  thus  holding  stock  nor  any  person 
who  afterwards  became  a  stockholder  by  assignment  from  one  who 
'  then  held  stock  can  now  make  complaint  on  behalf  of  the  corporation 
against  the  lawfulness  of  that  transaction.  This  I  take  to  be  the 
settled  law  on  that  subject." 

The  next  evolutionary  step  is  to  be  found  in  the  recognition  by 
both  the  legislatures  and  courts  of  a  number  of  the  Commonwealths 
of  the  unsatisfactory  results  attending  the  application  of  not  only 
the  narrow  and  falsely  conceived  "  true  value  rule  "  above  referred 
to,  but  that  of  the  "  good  faith  rule  "  as  well.  It  was  clearly  seen 
that  something  further  was  needed  in  order  to  remove  the  subject 
for  all  time  from  its  situation  of  uncertainty  and  doubt.  Both  the 
legislatures  and  the  courts  of  these  Commonwealths  undertook  to 
remedy  the  matter,  with  what  success  it  will  hereafter  appear. 
Certain  of  the  States,  such  as  New  Jersey,  New  York,  Delaware, 
West  Virginia,  Connecticut,  and  others,  enacted  statutes  providing 
in  substance  that  in  those  cases  where  corporations  attempted  to 
iS8i»  their  capital  stock  as  fully  paid  in  exchange  for  property* 

1  Handley  v.  Stutz,  139  U.  S.  417 ;  35   N.  Y.  263  ;  26  N.  E.  145;  Parmalee  ». 
L.  E.  227  ;  Scovill  v.  Thayer,  105  U.  S.    Price,  208  111.  544  ;  70  N.  E.  725. 
143;  26  L.  £,  968;  Bair  v.  Compaay,  125       ^  Northern  Trust  Co.  v.  Companj,  75 

Fed.  936. 

115 


{101  mCOBPORATION  AND  ORGANmilON  OF  COSPOBATIONS.  [PABTI. 

the  valnations  placed  upon  such  property  by  the  board  of  direc- 
tors thereof  should,  in  the  absence  of  actual  fraud  or  gross  over- 
valuation, be  conclusive  in  the  premises.  Again,  other  States 
sought  to  remedj  the  evil  in  a  sarer,  if  less  generail j  satisfac- 
tory form.  Tims,  for  examine,  Michigan,  Virginia,  Florida,  and 
other  States  have  acts  upon  their  statute  books  requiring  a  de- 
scription of  the  property  which  they  desire  to  accept  in  exchange 
for  their  capital  stock  to  be  submitted  to  State  officials  in  order 
that  the  valuation  placed  upon  such  prq)ertj  by  the  corporation 
may  be  ap^ved  hy  such  State  officials  before  the  stock  can  be 
issued;  the  act  further  generally  providing  that  after  such 
appraisal  has  been  approved  by  the  State  officials,  it  should  be 
conclusive  in  the  premises. 

Turning  now  to  the  efforts  of  the  court  on  their  part  to  remedy 
the  evil  above  referred  to,  the  following  may  be  said.  Without  in 
terms  adopting  what  is  hereinafter  referred  to  as  the  ^<  speculative 
value  rule*'  the  courts  in  recent  years  have  often  recognized,  in 
connection  with  attempts  on  the  part  of  corporations  to  issue  stock 
as  full  paid  in  exchange  for  property,  the  distinction  that  clearly 
obtains  between  property  which  has  either  a  well-known  or 
easily  ascertained  market  valne  and  that  other  species  of  property 
of  the  character  commonly  known  as  *'  speculative,"  which  with- 
out any  present  large  intrinsic  value,  possesses  nevertheless  in 
almost  every  instance  a  large  value  for  future  speculative  pur- 
poses, not  determinable,  however,  by  the  ordinary  marked  value 
standards.  Sndi  a  rule,  when  generally  recognized,  will  have  the 
effect  in  law  of  practically  dividing  corporations  into  two  great 
classes  with  respect  to  the  question  of  issuing  stock  thereof  in 
exchange  for  property,  to  wit,  non-speculative  and  speculative 
corporations. 

On  the  subject  now  before  us  certain  pcHiions  of  the  able  report 
of  the  Massachusetts  legislative  committee  on  corporations  ren- 
dered in  1903,  is  so  peculiarly  instructive  and  appropriate  that  we 
venture  to  quote  the  following  extract  therefrom : 

"The  history  of  corporations,  as  well  as  the  logic  of  the  case, 
shows  that  there  are  possible  two  general  theories  as  to  the  State's 
duty  in  creating  corporations:  first,  the  old  theory  that,  being 
creatures  of  the  State,  they  should  be  guaranteed  by  it  to  the  public 
in  all  particulars  of  responsibility  and  management;  and  the  modem 
quite  opposite  theory  that^  in  the  absence  of  fraud  in  its  organization 
116 


CHAP.  IV.]     ISSUANCE  AND  PAYMENT  OP  CAPITAL  STOCK.         §  101 

or  government,  an  ordinary  business  corporation  should  be  allowed  to 
do  anything  that  an  individual  may  do.  Under  the  old  theory,  the 
capital  stock  of  a  corporation  was,  in  the  law,  considered  to  be  a 
guarantee  fund  for  the  payment  of  creditors,  as  well  as  affording  a 
method  of  oonvenieniay  measuring  the  interests  of  the  individual 
owners  of  a  corporate  enterprise.  There  resulted  from  thU  principle 
not  only  the  fundamental  proposition  that  the  capital  stock,  being  in 
the  nature  of  a  guarantee  fund,  should  be  paid  up  at  its  fuU  par  m 
actual  cash,  but  all  the  other  provisions  to  protect  creditors  or  other 
persons  having  dealings  with  the  corporation :  such  as,  that  the  debts 
of  a  corporation  should  not  exceed  its  capital  stock,  designed  prima- 
rily in  the  interest  of  creditors  and  secondarily  in  that  of  the  stock- 
holders, who  were  looked  after  as  carefully  as  if  they  were  the  wards 
of  the  State  when  dealing  in  eorporation  matters.  Under  the  modern 
theory  the  State  owes  no  duty  to  persons  who  may  choose  to  deal 
with  corporations,  to  look  after  the  solvemqr  of  soeh  artifidalhodies; 
nor  to  stockholders,  to  protect  them  from  the  consequenees  of  going 
into  such  concerns,  the  idea  being  that  in  the  case  of  ordinary  busi- 
ness corporations  the  State's  duty  ends  in  providing  clearly  that  credi- 
tors and  stockholders  shall  at  all  times  be  precisely  informed  of  all 
the  &cts  attending  both  the  organization  and  the  management  of 
such  corporations,  and  particularly  that  there  should  be  fuU  publicity 
given  to  all  details  of  the  original  organization  thereof. 

«The  committee  has  had  little  hesitation  in  determining  which  of 
these  theories  it  should  adopt.  The  limit  of  capitaliiation  both  in 
amount  and  in  valuation  to  the  net  tangible  assets  of  the  eorporation 
has  unquestionably  had  much  to  do  with  the  arrest  of  corporate 
growth  in  this  Commonwealth.  Good-will,  trade-marks,  patents  may 
unquestionably  be  valuable  assets,  which,  under  our  present  method, 
'  may  not  be  capitalized.  Admirable  as  this  theory  may  have  been,  of 
payment  of  capital  stock  in  full  in  cash,  the  condition  is  so  easily 
avoided  in  practice  that  the  result  is  that  our  existing  law  promises  a 
protection  which,  in  reality,  it  does  not  afford,  and  is  merely  an  em- 
barrassment to  those  who  feel  obliged  to  comply  not  only  with  the 
letter  but  with  the  spirit  of  the  law.  It  is  no  longer  true  that  persons 
dealing  with  corporations  rely  upon  the  State  laws  to  guarantee  their 
solvency  or  their  proper  management.  The  attempts  of  the  Common- 
wealth to  do  so  by  laws  still  remaining  on  its  statute  books  result,  as 
we  apprehend,  only  in  a  false  sense  of  security;  and  we  believe  that 
the  act  proposed,  while  giving  up  the  attempt  to  do  the  impossible 
thing,  will  really,  by  its  greater  attention  to  the  details  of  organiza- 
tion required  to  be  made  public  by  all  corporations,  result  in  an  ad- 
vantage to  stockholders  and  creditors  more  substantial  than  the 

117 


§  101  INCOBPOBATION  AND  ORGANIZATION  OP  COEPOEATIONS.  [PAET  I. 

present  partial  attempt  to  enforce  a  principle  impossible  of  complete 
realization  and  which  is,  under  existing  laws,  easily  evaded. 

*<  It  is  impossible  to  reconcile  or  combine  the  two  systems.  Either 
the  old  theory  must  be  maintained,  under  which  the  State  attempts 
though  vainly  to  guarantee  both  to  stockholders  and  creditors  that 
there  is  one  hundred  dollars  of  aetnal  yalue  behind  eaoh  one  hundred 
dollars  of  par  valiie  of  capital  stock,  or  some  other  system  must  be 
adopted  which,  while  not  being  chargeable  with  the  vagueness  and 
laxity  of  the  newer  legislation  of  other  States,  will  permit  a  share  of 
capital  stock,  although  nominally  one  hundred  dollars  in  value,  to  rep- 
resent, as  the  word  implies,  only  a  certain  share  or  proportion,  which 
may  be  more  or  less  than  par,  of  whatever  net  assets  the  corporation 
may  prove  to  have.  Under  a  system  of  this  sort  the  State  machinery 
will  only  provide  that  the  stockholders  and,  perhaps,  the  creditors, 
may  at  all  times  htm  access  to  the  corporation  records  or  returns  in 
such  manner  as  dearly  to  show,  both  at  organiaadon  and  thereafter, 
all  of  the  property  or  assets  of  which  such  share  of  capital  stock 
aetoaUy  represents  its  proportion  of  ownership. 

"The  question  of  monopoly  the  committee  does  not  conceive  to 
have  been  left  to  its  consideration.  The  limitations  now  existing  on 
the  capitalization  of  business  corporations  are,  no  doubt,  attributable 
to  the  sentiment  which  has  always  existed  against  monopoly,  but  it  is 
clearly  the  policy  of  the  Commonwealth,  as  shown  in  its  recent  legis- 
lation, to  do  away  with  the  attempt  to  prevent  large  colorations, 
simply  beeanse  they  are  large.  Moreorer,  it  is  apprehended  that  the 
qne8tlo&  of  monopoly,  or  ratiier  of  the  abase  of  tiie  power  of  large 
corporations,  does  not  result  necessarily  from  the  8?ze  of  corporations 
engaged  in  business  throughout  the  United  States.  In  the  opinion  of 
the  committee,  some  confusion  has  been  created,  in  the  discussion  of 
the  form  of  so-called  trust  legislation,  by  a  failure  to  appreciate  that 
its  real  object  is  not  to  protect  the  investor,  who  can  or  should  learn 
to  take  care  of  himself,  or  the  creditor  who  has  already  learned  to  do 
so.  The  real  purpose  of  such  legi^tion  is  the  protection  of  the  con- 
sumer. In  other  words,  there  is  no  reason  for  an  artntrary  limitation 
of  capitalization  unless  it  can  be  nsed  as  a  means  of  creating  a  mo- 
nopoly which  will  influence  the  price  of  commodities.  In  the  opinion 
of  the  committee,  the  question  of  capitalization  is  not  a  contributing 
factor  in  the  fight  for  a  monopoly.  The  United  States  Steel  Company 
would  have  no  greater  and  no  less  a  monopoly  of  the  steel  business  if 
it  were  organized  with  one-half  of  its  present  capitalization.  The 
Standard  Oil  Company  has  a  very  conservative  capitalization,  and  yet 
it  is  the  most  complete  monopoly  of  aay  industrial  oorporatioii  in  tills 
covuitry. 

118 


CHAP.  IV.]    ISSUANCE  AND  PAYMENT  OF  CAPITAL  STOCK.         §  101 

"  At  all  events,  it  is  no  better  for  the  State  to  leave  its  citizens  at 
the  mercy  of  the  large  corporations  created  by  other  less  careful  sover- 
eignties, than  to  permit  the  organization  of  corporations  adequate  to 
the  demands  of  modem  bosiness  under  its  own  laws,  subject  to  its 
own  more  careful  regulation  and  controL  Under  our  State  and  Fed- 
eral system  it  is  practically  impossible  for  any  one  State,  by  its  own 
laws,  to  control  foreign  corporations,  but  so  far  as  possible  at  present 
the  committee  has  sought  to  subject  them  to  the  same  safeguards  of 
reasonable  publicity  and  accurate  returns,  both  as  to  organization  and 
annual  condition,  as  the  State  requires  of  its  own  corporations.  The 
simple  requirement  of  an  annual  excise  tax,  based  on  the  capital- 
ization of  such  foreign  corporations,  will  serve  to  bring  them  under 
the  control  of  this  State,  and  the  way  will  be  open  for  their  further 
regulation  if  desirable.  This  annual  taK  has  been  levied  upon  the 
same  principle  as  the  corresponding  tax  paid  by  homo  corporations. 
The  State  should  impose  no  greater  burden  on  foreign  corporations 
than  on  its  own,  but  should,  so  far  as  possible,  subject  them  to  its 
own  laws. 

"The  committee  would  repeat  its  opinion  that,  so  far  as  purely 
business  corporations  are  concerned,  and  excluding  insurance,  finan- 
cial, and  public  service  corporations,  the  State  cannot  assume  to  act, 
directly  or  indirectly,  as  guarantor  or  sponsor  for  any  organization 
under  corporate  form.  It  can  and  should  require,  for  itself  and  for 
the  use  of  all  persons  interested  in  the  eorporation,  the  fullest  and 
most  detailed  information,  consistent  with  practical  business  methods, 
as  to  the  details  of  its  organization,  the  powers  and  restrictions  im- 
posed upon  its  stockholders,  and  as  to  the  property  against  which 
stock  is  to  be  or  has  been  issued. 

«  Capital  stock  may  be  paid  for  in  cash  or  by  property.  If  it  is 
paid  for  in  cash,  it  may  be  paid  for  in  full  or  by  instalments,  and  a 
machinery  has  been  created  for  protecting  the  corporation  against  the 
failure  of  tiie  subscribers  to  stock  to  pay  the  balance  of  their  sub- 
scriptions. If  stock  is  paid  for  by  property,  the  incorporators  and  not 
the  State  are  to  pass  upon  its  value.  Before  any  stock,  however,  can 
be  issued  for  property,  a  description  of  the  property  sufficient  for 
purposes  of  identification,  to  the  satisfaction  of  the  Commissioner  of 
Corporations,  must  be  filed  in  the  office  of  the  Secretary  of  the  Com- 
monwealth. This  document  becomes  a  public  record,  and  may  be 
consulted  by  any  one  interested  in  the  corporation.  If  the  officers  of 
a  corporation  make  a  return  which  is  false  and  which  is  known  to  be 
false,  they  are  liable  to  any  one  injuiedior  actual  damages.  If  a  fall 
and-honest  description  is  made  of  property  against  which  stock  is 
issued,  a  stockholder  cannot  complain  because  of  his  failure  to  inform 

119 


§103  INCORPORATION  AND  ORGANIZATION  OF  CORPORATIONS.  [PABTL 

himself  by  personal  examination  or  investigation  of  the  value  of  the 
property  in  which  he  is,  or  contemplates  becoming,  an  investor. 

"  The  second  principle  upon  which  the  committee  has  acted  in  its 
specific  recommendations  is  this :  that  the  State  should  permit  the 
utmost  freedom  of  self-ie^^ulation  if  it  provides  quick  and  effective 
machineiy  im  the  punishmeiit  of  frand^  and  gives  to  each  stockholder 
the  right  to  obtain  the  foUest  information  in  regard  to  his  own 
rights  and  privileges  before  and  after  he  becomes  the  owner  of 
stock." 

§  102.  Payment  of  Capital  Stock  in  Services.  —  The  statutes  of 

Alabama,  Arkansas,  California,  Colorado,  Delaware,  Florida, 
Idaho,  Kentucky,  Maine,  Misaouri,  Montana,  North  Dakota,  South 
Carolina,  Soutii  Dakota,  Texas,  Utah,  Vii^inia,  Washington,  West 
Virginia,  and  Wisconsin  expressly  authorize  the  payment  of  stock 
in  services.  It  sometimes  becomes  a  question  of  importance  to 
know  just  what  is  meant  by  "services"  as  used  in  this  conneo-. 
tion.^  Frequently  attempts  are  made  to  issue  stock  to  persons 
gratuitously  tor  ^be  wm  id  Hietr  name  in  the  promotion  of  the 
corporation  under  the  theory  that  permission  to  use  their  name  is 
a  proper  service  rendered  to  the  company,  against  which  stock 
may  be  issued.  The  current  of  authority  seems  to  be  against  this 
proposition.^ 

Still  i^^ain,  the  ccm8tituti<mal  proviwcm  which  exists  in  many  of 
the  States  declaring  all  fietilions  inerease  ol  atock  void  militates 
against  such  lines  of  procedure.* 

Oftentimes  an  attempt  is  made  to  issue  stock  to  promoters  of 
corporations  under  what  is  known  as  "  promotion  stock."  The 
promoters  are  usually  the  incorporators,  and  as  aueh  are  not 
entitled  to  gito  of  stock.^  However,  if  in  the  promotion  of  the 
company  services  and  time  have  been  employed,  the  same  may 
be  recompensed  to  the  extent  of  the  just  value  of  such  services. 

§  103.  Payment  of  Capital  Stock  in  Property.  —  In  most  of  the 

Commonwealths  statutes  exist  expressly  authorizing  Hie  payment 
of  capital  stodk  of  a  eorpm^Mm  in  property.*  £v^  in  the  absence 

1  See  Arapahoe,  etc.  Co.  v.  Stevens,  13  Fogg  p.  Blair,  139  U.S.  IIS;  8S  Lnr  Ed. 

Col.  534;  22Pac.823j  Clevengerv.Moore  104. 

(N.  J.),  58  Atl.  88.  3  See  Hellerman  v.  Maier,  116  CaL 

*  P.  8.  Bank  v.  Company,  105  Mich.  416;  48  Pac.  377. 

SSft;  es  N.  W.  SU;  ChfiMeiiMii  9.  Eno,  *  Brown  v.  F.  8.  H.  Co.,  119  Fed. 

106  N.  Y.  97 ;  12  N.  E.  648 ;  HaDdlej  v,  472. 

Stall,  139  U.  S.  417;  S5Uw£d.  227;  •  8m Ftellll.  IMib  10, pM SSO, 

120 


C»AP.  IV.]    ISSUAKCB  AM)  PAYMENT  OF  CAPITAL  STOCK.         §  103 

of  such  statute  stock  may  doubtless  be  issued  in  the  same  manner, 
provided  the  purchase  of  such  property  is  within  the  express  or 
implied  powers  conferred  by  the  charter  and  the  property  is  of 
such  a  character  as  to  be  suitable  for  the  specific  purpose  for 
which  the  corporation  was  formed.^  Some  few  of  the  States 
describe  in  considerable  detail  just  what  kinds  or  classes  of 
property  may  be  accepted  by  the  corporation  in  exchange  for 
its  capital  stock.  The  incorporation  acts  of  Alabama,  North 
Carolina,  Virginia,  West  Virginia,  and  New  Jersey  are  partic- 
ularly full  in  this  regard.  In  the  absence  of  such  provisions 
corporations  under  the  restrictions  stated  above  may  accept  in 
payinent  of  their  capital  stock,  all  kinds  of  real  and  personal 
property  having  some,  monetory  value,  such  as  mining  huids,  gas 
lands,  patent  rights,  secret  formula,  trade-marks,  and  the  good 
will  of  an  established  business  ^ 

The  payment  of  capital  stock  may  be  made  in  notes,  bonds,  or 
mortgages  in  the  absence  of  any  statutory  or  charter  prohibition.^ 
But  as  to  creditors,  if  the  notes,  bonds,  er  mortgages  should  turn 
out  to  be  worthless,  the  parties  accepting  such  stock  might  be 
compelled  to  pay  the  par  value  of  such  stock  in  money.*  So  it 
has  been  held  that  stock  of  a  corporation  may  be  paid  for  in 
advertising,^  in  a  license  to  take  minerals  from  lands,^  and  in 
stock  in  other  corporations  J 

In  other  words,  capital  stock  of  a  corporation  may  be  issued 
against  any  property  which  the  corporation  is  authorized  to  pur- 
chase, or  which  is-  necessary  for  its  legitimate  business.^ 

One  of  the  most  frequent  questions  with  which  an  attorney  has 
to  deal  in  connection  with  the  organization  of  a  corporation  has 
reference  to  devising  some  Mife  method  whereby  stock  may  be 
legally  issued  in  the  first  instance  as  full  paid  and  non-assessable, 
to  be  thereafter  sold  below  par  if  necessary  for  the  purpose  of 
procuring  a  working  capital  for  the  company.   The  main  thing 

1  liebke  V.  Knapm  79  Mo.  22.  ^  Goodrich  v.  Beynolds,  31  HI.  490; 

2  Loud  V.  Company,  153  U.  S.  564 ;   Stoddard  v.  Company,  44  Conn.  545. 

141  S.  Ct.  928 ;  Carr  v.  La  Fevre,  27  Pa.  *  Bouton  w.  Boieiit,  123  III  142 ;  14 

417  ;  American  Tube  &  Iron  Co.  v.  Com-  N.  E.  62. 

pany,  165  Pa.  St.  489 ;  30  Atl.  940 ;  Young  »  Liebke  v.  Enapp,  79  Mo.  22. 

«.  Company,  65  Mieh.  Ill ;  81  N.  W. 814;  •  Sh^iard  ».  Ihnke,  61  Ma  Ap.  184. 

Wafthbnra  v.  CompAny,  81  F«d.  17 ;  ^  East  K.  Y.  J.  B.  Co.  v.  TigiitiiaM,  88 

Whitehill  v.  Jacobs,  75  Wis.  474;  44  How.  Pr.  481. 

N.  W.  630;  Bank  v.  Company,  32  W.  Va.  »  Bruner  ».  Brown,  139  Ind.  600  i  38 

37 ;  59  S.  E.  243  ;  KeUy  v.  Clark,  21  Moat.  N.  £.  318. 
819;  53  Pac.  959. 

121 


§  104  INOOBPOBAncm  Ain>  OWAmunON  of  OQBPOAATICmS.  [PABtt 

to  be  kept  in  mind  in  conneetion  with  the  foregoing  is  to  see  that 
the  stock  is  so  issued  that  fotore  purchasers  thereof  shall  not  be 
liable  thereon  either  to  the  corporation  or  to  creditors.  This  can 
be  accomplished  most  satisfactorily  in  the  following  manner. 

Have  the  corporation  accept  the  proposition  to  issue  its  capital 
stock,  either  in  whole  or  in  part,  against  real  or  personal  property 
to  be  thereafter  dulj  oonveyed  or  transferred  to  the  corporation. 
Next  the  property  so  conveyed  or  transferred  should  be  appraised 
at  a  valuation  which  will  stand  the  test  according  to  the  character 
of  the  property  so  conveyed  or  transferred  of  either  the  good  faith 
or  the  speculative  value  rules  already  referred  to.  The  next  step 
is  for  the  party  to  whom  such  stock  is  issued  to  transfer  such 
stock,  either  in  whole  or  in  part,  back  to  the  corporation  under 
a  trust  agreement  providing  that  the  same  shall  be  sold  at  such 
times  and  at  such  prices  as  to  the  board  of  directors  of  the  cor- 
poration will  seem  advisable  for  the  purpose  of  procuring  the 
necessary  working  cq>itaL    Under  such  dreumstances  the  stock 

80  traarferred,  while  originally  issued  at  par,  may  be  sold  at  the 
best  price  obtainable,  and  the  purchasers  will  not  incur  liabil- 
ity beyond  the  agreed  price  even  to  subsequent  creditors.^  The 
same  is  true  of  stock  that  has  be^  forfeited  for  non-payment  <^ 
assessments.^ 

§  104.  AtitMaui  of       Waliie  Ride.  — In  connection  with  the 

appraisal  of  property  taken  by  a  corporation  in  exchange  for  its 
capital  stock,  the  courts  have  established  various  rules  with  a  view 
to  laying  down  some  satisfactory  principle  upon  which  such 
appraisal  may  be  based  in  those  eases  where  creditors  seek  to 
enforce  as  against  the  hddm  of  such  stock  an  alleged  liability 
for  unpaid  stock  subscriptions.  The  various  rules  here  referred 
to  may  be  enumerated  as  follows :  "  the  true  value  rule,"  "  the  good 
faith  rule,"  and  "  the  speculative  value  rule.''  It  is  to  the  first 
of  these  that  our  attention  will  now  be  directed. 

What  is  known  as  ^  the  true  value  rule  ^  is  a  natural  outgrowth 
of  the  adoption  by  many  of  the  courts  of  the  trust  fund  doctrine 
enunciated  by  J udge  Story  in  Wood  v,  Dummer.^   This  may  be 

>  Ifon  Co.  «f  a2. 9.  Hayet  <f  oL,  185  7  S.  Ct.  482 ;  Coleman  v.  Howe,  154  111. 

81  489  ;  30AtL9S8;  Lakft  Sop.  Iron  Co.  458;  89  V.  E.7S5;  Kiml»U  t>.  Company, 
9.  Drazel,  90  N,  Y.  87  ;  Davis  Bros.  v.  69  N.  H.  485  ;  45  AU.  258. 

Company,  101  Ala.  127 ;  8  So.  496 ;  Ailing  2  PuUmtn  v.  Company,  73  HI.  Ap.  818; 

V.  Wenzel,  133  111.  264;  24  N.  E.  551 ;  Otter  v.  Company,  50  Barb.  247. 

M.  &  L.  R.  Ry.  Co.  t;.  Dow,  120  U.  S.  287 ;  8  3  Masoii,  308 ;  Fed.  Cmm,  Ho.  17944. 
122 


CHAP.  IV.]    ISSUANCE  AND  PAYMENT  Of  CAPITAL  STOCK.         §  105 

stated  as  follows :  That  the  courts  will  not  treat  anythiug  in  the 
shape  of  property  accepted  by  the  corporation  in  exchange  for  its 
capital  stock  as  payment  thereof  except  to  the  extent  of  the  true 
value  of  the  property  received,  wholly  without  regard  to  the  pres- 
ence of  fraud  or  the  absence  of  good  faith  in  the  transaction.^ 

Not  only  has  the  true  value  rule  been  adopted  by  many  courts, 
irrespective  of  statute,  but  it  has  found  legislative  tec<^ition  as 
well.  Thus  the  incorporation  act  of  Alaska  requires  that  such 
property  shall  be  assessed  at  its  true  money  value ;  that  of  Con- 
necticut and  Delaware,  at  its  actual  value ;  in  Kentucky,  at  its 
market  pi^ice ;  in  North  Dakota  and  South  Carolina,  at  its  true 
money  value ;  in  Tennessee  and  Utah,  at  its  fair  cash  yaliie,  and 
Florida,  at  a  just  valuation.  In  Connecticut,  Massadiimetts,  and 
North  Dakota  the  necessity  of  making  such  appraisal  according 
to  the  strict  letter  of  the  statute  is  very  forcibly  suggested  by 
making  the  directors  liable  to  all  parties  injured  thereby  in  case 
they  fail  to  make  such  appraisal  as  directed  by  the  act  Statutoiy 
provisions  whidi  exist  in  so  many  of  the  States  dedaring  all 
fictitious  increase  of  stock  void  have  been  held  by  the  courts 
not  to  make  the  validity  of  an  over-issue  of  stock  dependent  upon 
the  inquiry  whether  the  money  or  property  received  therefor  was 
of  equal  value  in  the  market  with  the  stock  so  issued,  or  to  restrict 
private  corporations  acting  without  the  approval  of  l^r  stock- 
holders in  the  sale  of  their  stock  for  money,  property,  or  labor 
done  upon  such  terms  as  they  might  deem  proper,  provided  always 
that  the  transaction  is  a  real  one,  based  upon  present  consideration, 
having  reference  to  legitimate  corporate  purposes,  and  is  not  merely 
a  device  to  evade  the  law  and  accomplish  l^at  which  is  forbidden.* 

§  105.  Btatoment  of  Oood  Faith  Role.  —  As  has  already  been 
observed  in  a  previous  section,^  the  trust  fund  theory  of  Justice 
Story  no  longer  obtains  in  a  majority  of  the  States.  With  the 
absence  of  any  general  recognition  by  the  courts  of  this  doctrine, 
there  necessarily  followed  the  abrogation  of  the  true  value  rule, 
which  was  based  largely  upon  the  trust  fund  doctrine.  In  its 
place  has  appeared  in  many  jurisdictions  what  is  known  as  the 
"  good  faith  rule."  The  true  value  rule  in  its  practical  applica- 
tion was  harsh  and  unconscionable,  was  wholly  in  the  interest  of 

1  Shickle  v.  Watts,  94  Mo.  410;  7  Pac.  582;  M.  &  L.  R.  Ry.  Co.  v.  Dow, 
S.  W.  274.  •      120  U.  S.  287  ;  7  S.  Ct.  482. 

s  Smith  V.  Company,  115  CaL  584  ;  47       ^  Ante,  §  101. 

123 


§105  INCOftPO&ATION  AND  OBOANIZATIOII  OF  C01F(»UT»>Ma.  [PABTL 

creditors,  and  made  little  account  of  - the  interestg  of  equally  inno- 
cent stockholders.  The  good  lalth  rale,  on  the  other  hand,  while 
often  difficnlt  of  practical  application,  is  much  more  liberal  and 
fair  to  all  concerned  than  the  rule  which  it  is  now  so  rapidly  sup- 
planting.   It  may  be  stated  as  follows : 

That  where  the  governing  statute  authorizes  Uie  shares  to  be 
paid  for  in  property  instead  el  ca^,  or  where  the  law  of  the  Slate 
concedes  this  power,  then  the  fact  that  they  are  so  paid  for  at  a 
fair  valuation  of  the  property,  affords  no  ground  of  complaint  to 
the  creditors,  provided  such  payment  is  made  and  accepted  in 
good  faith.  In  fact,  in  order  to  render  the  transaction  Toid 
either  gross  OYer-Talttati<m  or  aetnal  fraud  must  be  shown.^ 

In  order  to  obtain  a  ctear  understanding  of  the  distinction  that 
exists  between  the  true  value  rule  and  the  good  faith  rule,  it  is 
necessary  to  understand  the  reasons  which  actuated  so  many  of 
the  courts  in  repudiating  in  the  first  instance  the  trust  fund  doc- 
trine in  order  to  clear  the  way  for  the  adoption  by  such  courts  of 
the  good  faith  rale.  Nowhere  will  be  foond  a  better  statement  of 
this  matter  than  that  presented  by  Justice  William  Mitchell  of  the 
Minnesota  Supreme  Court  in  the  case  of  Hospes  v.  Northwestern 
Manufacturing  Company.^ 

It  is  difficult,'*  said  Justice  Mitchell,  if  not  impossible,  to 
explain  or  reconcile  decinons  and  cases  bearing  upon  the  trust 
fund  doctrine,  or,  in  the  light  of  them,  to  predicate  the  liability  of 

the  stockholder  upon  that  doctrine.  But  by  putting  it  upon  the 
ground  of  fraud,  and  applying  the  old  and  familiar  rules  of  law 
on  that  subject  to  the  peculiar  nature  of  a  corporation  and  the 
relation  jriaeh  its  stockholders  bear  to  it  and  to  the  public,  we 
haye  at  oiiee  rational  and  logical  ground  on  which  to  stand.  The 
capital  of  a  corporation  is  the  basis  of  its  credit.  It  is  a  substi- 
tute for  the  individual  liability  of  those  who  own  its  stock.  People 
deal  with  it  and  give  it  credit  on  the  faith  of  it.  They  have  a 
rig^t  to  assume  that  it  has  paid  in  capital  to  the  amount  which 
it  represents  itsdf  as  having;  and  if  they  gire  it  cradit  on  the 
faith  of  that  refn-esentation,  and  if  the  representation  is  false,  it 
is  a  fraud  upon  them  ;  and  in  case  the  corporation  becomes  insol- 

1  Bank  v.  Alden,  129  U.  S.  372;  32  Whitehill  v.  Jacobs,  75  Wi«.  474;  44 

L.  E.  725  ;  Rood  v.  Wharton,  74  Fed.  118;  N.  W.  630 ;  Young  v.  Comfm^,  M  Mifh. 

Coit  V.  Company,  119  U.  S.  343;  7  S.  Ct.  Ill  j  31  N.  W.  814. 
231;  Boynton  v.  Hatch,  47  N.  Y.  225;       «  48  Minn.  174;  60  N.  W.  1117. 
Taa  CotI  v.  Van  Bnmt,  8S  K.  T.  685; 

124 


CHAP.  IV.]    I8S0ANCB  AHD  PAYMENT  OP  CAPITAL  STOCK.  §  106 

vent  the  law,  upon  the  plainest  principles  of  common  justice,  says 
to  the  delinquent  stockholder,  *  Make  that  representation  good  by 
paying  for  your  stock.'   It  certainly  cannot  require  the  invention 
of  any  new  doctrine  in  order  to  enforce  so  familiar  a  rule  of  equity. 
It  is  the  misrepresentation  of  fact  in  stating  the  amount  of  capital 
to  be  greater  than  it  really  is  that  is  the  true  basis  of  the  liabih  y 
of  the  stockholders  in  such  cases;  and  it  follows  that  it  is  only 
those  creditors  who  have  relied,  or  who  can  fairly  be  presumed  to 
have  relied,  upon  the  professed  amount  of  capital,  m  whose  favor 
the  law  will  recognize  and  enforce  an  equity  against  the  holders 
of  '  bonus  stock.'    This  furnishes  a  rational  and  uniform  rule,  to 
which  familiar  principles  are  easily  applied,  and  which  frees  the 
subject  from  many  of  tlie  difficulties  and  apparent  inconsistencies 
into  which  the  ^trust-fund'  doctrine  has  involved  it;  aod  we 
think  that  even  when  the  '  trust  fund '  doctrine  has  been  invoM 
the  decision  in  almost  every  well-considered  case  is  readUy 

referable  to  such  a  rule."  ^  .  n 

Another  statement  of  the  good  faith  rule  is  to  be  found  in  Kelley 
V.  Company,!  to  the  following  effect:  If  the  nature ^  the  iffoperty 
and  the  extent  of  the  valuation  are  such  that  the  latter  might  have 
been  due  to  errors  of  judgment,  then  to  render  the  transaction 
invalid  as  against  creditors  actual  fraud  must  be  shown,  and  the 
question  is  one  of  fact  On  the  other  hand,  if  the  ovei-valuation 
is  so  gross  that  it  could  not  have  been  due  to  mere  errors  of  judg- 
ment, the  transaction  will  be  held  fraudulent  as  a  matter  <d  law.* 
§106.  Statement  of  "Speculative  Value  Rule."  —  It  must  be 

admitted  that  neither  the  "  true  value  rule nor  the  "  good 

1  21  Moot.  819 ;  51  Ric.  959.  By.  Co.  (CaL),  51  Pac.  710 ;  Jenkins  v. 

«  Coleman  v.  Howe,  154  111.  458;  89  Bradley,  104  Wis.  540;  80  N.  W.  1025; 
H  E.  725;  N.  H.  H.  N.  Co.  v.  Company.  Gamble  v.  Q.  C.  W.  Co  123  N.  Y.  91  ; 
142  Mass.  349  ;  7  N.  E.  773;  Hastings  25  N.  E.  201  ;  Yonng^Erie  Iron  Co., 
Malting  Co  v.  Companv,  65  Minn.  28;  67  65  Mich.  Ill  ;  31  N.  W.  814; 
N  W  652;  Northern  Trust  Co.  v.  Com-  Alden,  129  U.  a  S7«;  89  L.  E.  72d  ; 
pany,  75  Fed.  936 ;  affirmed  in  Dickineon  Coffin  v.  Ransdell,  110  Ind.  417  ;  11  N.  t.. 
t  NortllcmTnwtCo.,80Fed.452;  Wash-  20;  Bickley  v.  Schlag,  46  N.  J.  Eq  533; 
tarn  V,  Company,  81  Fed.  17  ;  Goodrich  20  Atl.  250;  S.  R.  C.  S.  Co.  v.  Rankin. 
».  Reynolds,  31  111.  490 ;  Edwards  f.  Cora-  45  111.  Ap.  226;  Bruner  v.  Brown,  139 
pany,  27  La.  Ann.  474;  Whitehill  ^^  Jacobs,  Ind.  600;  38  N.  E.  318;  Gilkie,  ete.  Co. 
75  Wis  474  ;  44  N.  W.  630 ;  Humaston  v.  v.  D.  T.,  etc.  Co.,  46  Neb.  888 ;  84  «.  W. 
■  Company,  20  Wall  20 ;  State  ».  Wfkh,  978 ;  A.  T.,  ete.  Ca  ».  H^fi,  l«5  St. 

110  Ala.  214;  20  So.  469;  Skinner  t».   489;  80AtL936;  Jones  ».  Whitworth,  94 
-  Smith.  184  N.  Y.  240 ;  31  N.  E.  91 1  ;  Par-    Tenn.  602  ;  30  S.  W.  736 ;  M.  T.  Ca  v. 
malee    Price,  208  111.  544  ;  70  N.  E.  725;    S.  C.  etc.  Co..  16  Wash.  499;  48  Pac. 
Phelan  v.  Hazard,  19  Fed.  Cases  No.   333;  .Taylor  y.  Cummmgs,  127  Fed.  108. 
11068  ;  5  Dill.  45;  Smith  y.  Ferrier,  etc. 

1S5 


§  106  INCOEPOBATION  AND  ORGANIZATION  OF  COBPOBATIONS.  [PABT  I. 

faith  rule"  affords  a  satisfactory  basis  for  determiniag  all  ques- 
tions that  may  arise  relative  to  the  issuance  of  the  eapital  stoek 
of  a  eorporatimi  as  full-paid  and  nmi-assessahle  in  exchange 
for  property  transferred  to  it.  In  practice,  neither  the  inequi- 
table "true  value  rule"  nor  the  fairer  "  good  faith  rule"  will  be 
found  to  rest  on  any  satisfactory  or  substantial  basis.  Of  late 
years,  without  in  terms  calling  it  by  that  particular  name, 
courts  of  high  repute  have  in  substance  adopted  what  will  be 
termed  here  Oie  ''speculative  value  rule.'*  This  may  be  defined 
as  that  rule  whereby  a  corporation  is  permitted,  in  issuing  its 
capital  stock  as  full  paid  and  non-assessable  in  excliange  for 
either  real  or  personal  property,  to  appraise  tiie  latter  at  its 
potential  speculative  value,  lookmg  towards  its  future  development 
rather  tium  at  its  present  in^nsic  value.  The  statement  of  the 
role  would  be  incomplete  without  adding  that  in  all  cases  where 
such  appraisal  is  questioned,  the  burden  of  proof  of  attacking  the 
same  is  upon  the  creditor. 

The  rule  in  its^  practical  application  throws  upon  ite  creditor 
the  burden  o£  showing  that,  viewed  from  a  purely  speculative  stand- 
point, the  appraisal  made  by  the  corporation  of  such  property 
constituted  not  merely  an  over-valuation,  but  a  fraudulent  over- 
valuation as  well.    Before  attempting  to  discuss  at.  length  the 
speculative  value  rule,"  as  stated  above,  it  might  not  be  without 
its  advantage  to  trace  briefly  those  evolutionary  steps  along  legal 
lines  which  appear  to  have  paved  the  way  for  a  fuller  recognition 
on  the  part  of  the  courts  of  the  rule  here  contended  for.    In  the 
first  place,  we  have  the  enunciation  by  Justice  Story,  in  1824,  of 
the  now  all  hut  moribund  "  trust  fund  doctrine"  already  referred 
to.i   Then  ensued  a  period  of  years  when  flie  courts,  one  after 
another,  proceeded  to  adopt  the  doctrine  just  mentioned,  although 
it  was  unknown  to  the  common  law.    Gradually,  however,  it  came 
to  be  recognized  that  the  trust  fund  theory  was  wrong  in  principle 
as  well  as  inequitable,  leading  in  its  practical  operations  to  harsh 
and  unecmscionable  results.  This  gradually  led  to  the  adoption 
by  many  eomU^  of  a  better  and  more  enlightened  doctrine  which 
predicated  the  liability  of  stockholders  to  creditors,  not  upon  the 
trust  fund  doctrine,  but  upon  the  sounder  ground  of  fraud.^ 

1  8eeWoodt;.Daminer,3M«wii,U.S.   Justice  Mitchell  in  Hospes  v.  Ccnmaj, 

„  48  Minn.  174 ;  60  N.  W.  1117. 

'  See  atalnBieirt  of  this  doetrine  by 


CHAP.  IV.]    ISSUANCE  AND  PAYMENT  OF  CAPITAL  STOCK.         §  106 

This  was  followed  by  the  enunciation  on  the  paH  of  certain 

coui'ts  of  several  important  rules  governing  the  question  of  the 
Durden  of  proof  in  cases  where  attempts  were  made  by  creditoi-s 
to  enforce  an  alleged  stockholder's  liability,  on  the  ground  that 
the  property  against  which  such  stock  had  been  issued  had  been 
grossly  over- valued.  A  fair  presentation  of  the  rules  here  referred 
to  may  be  found  in  the  opinion  of  the  Supreme  Court  of  Minnesota, 
in  Hastings  Maltuig  Co.  v.  Iron  Range  Brewing  Co.,i  reading  as 
follows: 

« In  principle  it  can  make  no  difference  whether  the  stock  issued  as 
paid  up  is  bonus  stock,  pure  and  simple,  or  whether  it  was  sold  for 
cash  for  less  than  its  par  value,  or  for  property  at  a  gross  over- 
yaluation.  In  the  first  two  cases  the  question  of  fraud  would  be  one 
of  law,  for  on  the  issuing  by  the  corporation  of  its  stock  as  paid  and 
its  acceptance  by  the  stockholders  when  in  fact  nothing  was  ever  paid 
for  it,  or  where  a  sum  of  money  less  than  its  par  Talue  was  paid  and 
accepted  for  it,  there  is  no  opportunity  for  a  mistake  of  judgment; 
the  law  in  such  cases  presumes  an  intention  to  defraud.  Ordinarily, 
however,  the  question  is  one  of  fact. 

Upon  principle  and  authority  a  corporation  may  in  good  faith  issue 
paid  up  shares  of  its  stock  for  the  purchase  of  property  at  a  fair 
valuation,  and  in  such  case  the  corporation  and  its  creditors  are  bound 
by  it. 

In  the  praetical  application  of  the  rule  it  must  be  kept  in  mind  that 
fraud,  actual  or  construetiFe,  is  tiie  basis  of  the  stockholders'  liability 
to  the  creditor.  On  the  one  hand,  the  value  of  the  property  is  to  be 
determined,  not  from  subsequent  events,  but  as  of  the  time  of  the 

transaction,  and  from  the  nature,  situation,  and  condition  of  the  prop- 
erty as  they  honestly  appeared  to  the  parties  at  the  time.  Although 
there  was  in  fact  an  over-valuation  of  the  property,  it  will  not  render 
tiie  stockholders  liable  for  the  deficiency  if  it  was  the  result  of  an 
honest  mistake  or  error  of  judgment.  On  the  other  hand,  where  the 
nature  and  condition  of  the  property  are  such  that  its  value  is  w^ell 
known  and  understood,  or  is  capable  of  being  readily  estimated  and 
ascertained,  and  *;he  property  is  transferred  to  the  corporation  at  a 
gross  over-valuation  for  paid-up  shares,  the  transfer  is  prima  facie 
fraudulent  as  to  subsequent  creditors,  and  as  against  them  the  burden 
is  upon  the  shareholders  to  rebut  the  presumption." 

It  is  a  principle  of  law  universally  recognized  that,  except  in 
cases  of  trust  relationships,  the  burden  of  proof  in  all  cases  relative 

1  65  Minn.  28 ;  67  N.  W.  652. 

127 


§  100  INCOEPOBATION  AND  ORGANIZATION  OP  CORPORATIONS.  [PART  I. 

to  proof  of  fraud  is  cast  upon  the  party  who  alleges  that  such 
fraud  exists.^ 

By  uo  stretch  of  the  imagination  can  the  relationship  tiiat  eziflts 
between  creditors  of  a  corporatiim  and  the  corporation  itself  be 
termed  a  tnwt  relationship.'*  The  relation  is  neither  confidential 
nor  fiduciary,  as  the  same  is  construed  by  the  courts .2  There  is 
no  more  reason  for  treating  this  relationship  as  one  of  trust  than 
there  is  in  the  case  of  ordinary  creditors  and  debtors.  It  was 
doubtless,  however,  as  a  sort  of  concession  to  the  fanciful  trust 
fund  doctrine  of  Justice  Story,  that  liiere  early  appealed  a  ten- 
dency, upon  the  part  of  certain  courts,  to  engraft  thereon  the 
absurd  principle  that,  where  the  board  of  directors  of  a  corporation 
have  duly  appraised  in  the  first  instance  property  taken  by  the 
latter  in  exchange  for  its  capital  stock,  tiie  rule  should  obtain 
that  whm  such  pt^^esty  has  a  well  known  or  easily  ascertained 
▼alue,  and  is  taken  at  a  valuation  which  to  the  court  seems 
greatly  in  excess  of  its  real  value,  then  in  such  cases  it  will  be 
presumed  that  such  valuation  is  not  made  in  good  faith,  but  is 
made  for  a  fraudulent  purpose.  To  oyercome  this  presumi^oii 
Hie  burden  is  upon  ihe  stockholders  to  in^txtuee  satishictory 
evidence  exi^anatorj  of  this  presumptively  fraudulent  over- 
valuation. Some  courts  even  went  further,  and  asserted  that 
w  here  the  over-valuation  was  so  great  that  the  fraudulent  inten- 
tion appeared  on  its  face  and  it  is  not  explained,  it  should  be  held 
fraudulent  as  a  matter  ol  law,  wUlioiit  Mbmittliig  the  queiitioQ  to 
a  jury. 

These  drastic  rules  had  full  sway  for  a  number  of  years,  until 
certain  of  the  courts  saw  fit  to  modify  their  rigor  to  no  inconsider- 
able extent  Then  the  rule  was  enunciated  that  where  stock  has 
llieii  paid  for  either  in  property  or  services,  altlioi^h  it  a{^)ear8 
tiiat  lliere  was  an  Ofver-valua^on  in  appraising  the  same,  yet  if  it 
appears  to  the  court  not  to  be  so  gross  and  unconscionable  as  to 
compel  it  to  say,  as  a  matter  of  law,  that  it  must  have  been  inten- 
tional, it  will  be  presumed  that  the  valuation  was  honestly 
made,  and  the  burden  of  attacking  the  same  will  be  upon  tiie 
creditors  who  seek  to  liold  the  stockholders  upon  an  alleged 
stockholders'  liability  for  unpaid  stock  subscriptions.^ 

1  See  Phelan  v.  Hazard,  5  DiL  45;  N.  E.  725;  Davis  Bros.  v.  Corapany,  101 

Bkkky  v.  Schkg,  46  N.  J.  Eq.  538.  Ala.  127 ;  8  S.  W.  496 ;  Manhattan  Trust 

*  See  BobiaaoD  p.  Pope,  57  CaL  496.  Co,  r.  Gompauy,  16  Wash.  499 ;  48  Pac. 

*  Coleman  v.  Howe,  154  UL  458  ;  89  388. 

128 


CHAP.  IV.]    ISSUANCE  AND  PAYMfeNT  OP  CAPITAL  STOCK.         §  106 

So  much,  then,  for  the  historical  development  of  the  various 
doctrines  relative  to  the  subject  matter  now  before  us.  Turning 
again  to  consider  the  ^  speculative  value  rule,"  the  same  must 
be  looked  at  from  two  separate  and  distinct  standpoints,  to  wit : 

(1)  as  dividing  all  properties  which  a  corporation  proposes  to 
take  over  in  exchange  for  its  capital  stock  into  two  broad  and 
well-defined  classes,  known  respectively  as  "speculative"  and 
non-speculative"  properties;  (2)  as  establishing  a  rule  for 
appraising  tiie  value  of  speculative  properties  based  not  upon  the 
intrinsic  value  of  the  same,  but  rather  upon  their  availability  for 
purposes  of  speculation,  looking  towards  an  enhancement  of  their 
present  value  by  the  future  expenditure  of  funds  in  the  develop- 
ment thereof. 

Let  us  now  turn  our  attention  to  the  classification  of  properties 
above  referred  to  designated  as  **  speculative  "  and  "  non-specula- 
tive." "  Speculative  "  properties  maj'  be  defined  as  those  whose 
nature  is  such  that  they  have  not  only  a  present  intrinsic  value, 
but  a  considerable  potential  value  as  well,  speculative  in  its 
nature,  md  dependent  upon  future  development  in  order  to  arrive 
at  a  definite  estimation  as  to  the  amount  thereof.  Non-specula- 
tive properties,  on  the  other  hand,  are  those  whose  intrinsic 
worth  alone  gives  them  a  market  value  or  a  value  which  can  be 
easily  ascertained  by  reference  to  well-recognized  standards  of 
value.  In  tlie  first  class  of  properties  might  be  enumerated 
mining  rights,  patent  rights,  oil  and  gas  lands,  secret  processes 
and  trade  secrets,  patent  medicines,  etc.  In  the  second  class 
might  be  named  real  estate  to  be  employed  for  business,  dwelling, 
farming,  and  grazmg  purposes,  stock  in  trade  and  personal  prop- 
erty which  istiie  common  subject  of  bmrgaia  and  sale  between  man 
and  man  at  current  prices,  determined  by  the  law  of  supply  and 
demand.  In  the  opinion  of  the  Supreme  Court  of  Jilinnesota,  in 
Hastings  Malting  Company  v.  Iron  Range  Brewing  Company, 
cited  above,  it  will  be  noted  that  the  rule  that  is  to  bp  applied  in 
those  cases  where  the  nature  and  condition  of  the  property  are  such 
tliat  its  value  is  well  known  or  understood,  or  is  capable  of  being 
readily  estimated  and  ascertained,  is  clearly  stated.  The  opinion, 
however,  fails  to  state  with  equal  clearness  the  rule  that  is  to  be 
applied  where  the  value  of  the  property  is  not  of  the  character 
just  described,  but  is  of  that  type  hereui  referred  to  as  ^  specu- 
lative," having  no  present  or  well-known  readily  ascertained 
»  129 


§106  INCORPORATION  AND  ORGANIZATION  OF  CORPORATIONS,  [PARTL 

value,  but  depending  entirely  upon  future  development  in  order  to 
determine  what  such  value  may  be.  Bj  implication  cmly  is  the 
tme  rule  in  such  cases  suggest^  bj  the  Minnesota  court  How- 
ever,  in  Kelly  tr.  Clark,*  the  Montana  Supreme  Court  in  efPect 
declares  the  rule  in  such  cases  to  be  that  where  the  property  is 
speculative  in  character,  and  as  such  the  alleged  over-valuation 
thereof  may  have  been  possibly  due  to  errors  in  judgment,  then  the 
burden  of  proof  is  npon  the  oreditors  seeing  to  attack  the  Tain* 
aMon  by  showing  aetoal  fraud  in  the  transaction. 

Let  us  tnm  now  to  the  question  as  to  how  the  valuation  of  spec- 
ulative properties  is  to  be  ascertained.  Generally  speaking,  the 
rule  to  be  adopted  is  this :  "  What,  under  all  the  circumstances, 
considering  the  juroposed  use  to  which  it  is  to  be  put,  and  the  gen? 
end  purpose  forwhieh  the  o^rporalton  was  crcMnted,  is  the  fair 
ralue  of  the  property  against  which  its  capital  stock  is  to  be 
issued  ?  "  2  In  this  age  of  speculative  enterprises  it  is  a  matter  of 
common  knowledge  that  the  value  of  properties  taken  over  by 
corporations  about  to  embark  in  speculative  enterprises  is  depend- 
ent almost  whdly  npon  their  ayailability  for  the  purpose  in  hand 
and  upon  the  promise  whidi  external  appearances  give  them  as 
to  their  having  a  large  and  considerable  potential  value.  Thus, 
for  example,  sixty  square  feet  of  land  may  have  a  very  small 
intrinsic  value  when  considered  as  farming,  grazing,  or  residence 
property,  and  yet  poaoooo  an  immense  potential  value  when  treated 
as  mining  jmperty.  It  is  the  expectation  of  success  which  in- 
duces investors  to  put  their  money  into  such  enterprises,  and 
which  justifies  a  valuation  far  in  excess. of  the  property's  intrinsic 
value.  Such  valuations,  it  must  be  admitted,  are  necessarily 
arbitrary  in  character.  This  fact  the  legislatures  in  many  States 
hare  recognized,  and  the  oourts  should  not  hesitate  to  do  the 
same.' 

The  value  of  property  which  is  transferred  to  the  corporation 
is  also  not  to  be  estimated  by  what  it  cost  the  promoter.  It  is  the 
speculative  and  experimental  results  which  afford  a  basis  for  the 
lai^  Taluati<m.  Bj  value  in  such  cases  is  ineant  the  sp^latire 
yalue  for  the  uses  and  purposes  of  the  company  in  its  proposed 
speculative  enterprise,  and  not  the  actual  market  value  or  the 

>  81  Moat  291 ;  53  Pac.  959.  <  See  Civil  Code  oi  Montana,  1895, 

>  869  QamUe  v.  Company,  1S8  H.  T.  §  4ia 
fl;  SftN.E.901. 

130 


 \H.s>;«tt^M^~ 


CHAP.  IV.]    ISSUANCE  AND  PAYMENT  OF  CAPITAL  STOCK.  §  106 

actual  intrinsic  value  thereof  at  the  time  the  properties  are  taken 
over  by  the  company. 

The  view  of  the  matter  here  presented  was  first  sa|^pested,  it  is 
belieyed,  by  the  United  States  Cirenit  Goort  many  years  ago  in  the 
case  of  the  Sonth  Monntain  Consolidated  Mining  Co.^  At  the  trial 
below  in  this  case  the  court  spoke  as  follows : 

<<The  mode  in  which  mining  companies  are  formed  is  familiar  to 
all.  The  owners  of  the  property,  or  persons  expecting  to  become 
such,  by  complying  with  a  few  simple  formalities  form  themselves 
into  a  corporation,  to  which  the  property  is  conveyed.  The  amount 
of  capital  stock  which  is  required  to  be  stated  in  the  certificate  of 
incorporation  is  usually  fixed  at  a  purely  arbitrary  sumi  and  divided 
into  as  many  shares  as  conTenienee  or  caprice  may  dictate.  It  neither 
bears  nor  is  intended  nor  supposed  by  the  public  to  bear  the  light- 
est relation  to  the  real  value  of  the  property  —  ayalne  nearly  always 
conjectural  and  very  often  imaginary." 

In  this  same  case  on  appeal  the  court  observed  as  follows : ' 

^  The  mode  of  forming  mining  corporations  is  well  known  to  anj 
body.    A  prospector  finds,  as  he  supposes,  a  valuable  mine.  It 

requires  capital  to  work  it  which  he  does  not  possess.  He  goes 
to  the  money  and  business  centres,  where  he  finds  capitalists  accus- 
tomed to  organize  corporations  for  the  development  of  new  mines, 
and  makes  such  arrangements  as  he  can.  He  presents  such  evidence 
of  the  value  of  his  mine  as  he  has  obtained.  Little  is  known  of  the 
real  value.  It  may  be  worth  nothing  and  it  may  be  worth  millions* 
Parties  are  fonnd  willing  to  take  hold  of  the  enterprise.  They  agree 
to  incorporate  and  fix  the  capital  stock  at  some  purely  nominal  amonnt|. 
and  divide  it  into  a  certain  number  of  shares,  corresponding  to  the 
amount  of  capital  adopted.  The  owner  of  the  mine,  for  an  agreed 
number  of  shares  and  in  consideration  of  the  promises  of  the  other 
parties  to  assist  in  the  development  of  the  mine,  conveys  the  mine 
and  receives  for  it  the  amount  of  stock  agreed  upon.  The  other 
parties,  for  their  services  in  organizing  and  managing  the  company  and 
its  business,  receive  a  large  portion  of  the  stoek,  this  being  usually  a 
eonsideraUe  amount  of  stock  reserved  by  tiie  company,  whieh  is  pot 
npon  the  market  and  sold  for  such  price  as  can  be  obtidned,  to  raise 
a  fund  to  secure  machinery  and  develop  the  mine.  The  price  of  this 
stock  is  of  course  determined  by  the  prospect  of  the  mine,  its  location, 
and  its  probable  richness,  and  the  confidence  of  the  public  reposed  in 

,  ^  7  SftW7W,S0;  SSairy»,S6S.  •  S  8aw7«r,  U.  &  8SS. 

131 


§106  INCORPORATION  AND  ORGANIZATION  OP  CORPORATIONS.  [PART  1. 

the  experience,  ability,  and  character  of  those  having  the  management. 
IMining  corporations  are  sui  fjeneris.  They  are  organized  and  carried  on 
upon  principles  wholly  different  from  banking,  railroad,  insurance,  and 
ordinary  commercial  corporations  having  a  subscribed  capital  stock.'^^ 

But  nowhere  is  the  speculative  element  in  the  valuation  of 
property  better  considered  than  by  the  Supreme  Court  of  Penn- 
sjlvania,  in  the  case  of  Iron  Co.  et  al  v.  Hays  ai.*  The  £^kcts 
in  this  case  briefly  stated  are  as  follows : 

A  corporation  was  organized  by  two  co-partners  to  take  over 
certain  lands  owned  or  leased  by  them  and  believed  to  contain 
gas  and  oil.  They  capitalized  the  company  for  $500,000,  aud 
issued  the  whole  <^  its  capital  stock  to  themselves  against  the 
properties  ahove  rderred  to.  These  latter  had  an  intrinsic  value 
representing  but  a  very  small  percentage  of  the  capitalization  of 
the  company.  The  incorporators  retained  175,000  of  the  capital 
stock  of  the  corporation  for  their  own  benefit,  and  transferred 
the  balance  to  the  corporation  in  trurt  to  be  sold  by  the  board  of 
directors  ^txmnl  for  the  purpose  of  procuring  working  capital  for 
the  corporation.  Later  on,  the  lands  proved  to  be  practically 
worthless,  and  the  company  became  insolvent,  and  creditors 
thereof  sued  the  stockholders,  alleging  that  the  stock  held  by 
them  had  not  been  fully  paid  for.  In  passing  upon  the  various 
legal  questions  involved,  the  court  spoke  as  follows  i 

Attention  should  he  called  first  to  the  method  of  organization,  to 
the  fscts  showing  the  situation  of  the  parties,  the  necessity  for  ob- 
taining corporate  powers,  and  the  provision  made  for  a  working  capi- 
tal with  which  to  enter  upon  the  proposed  corporate  enterprise. 

"The  corporators  had  been  partners.  As  such  they  had  been  en- 
gaged in  procuring  leases  and  drilling  wells  in  search  for  oil.  In 
their  search  they  had  not  been  successful,  but  two  of  the  wells  drilled 
by  them  proved  to  be  valuable  gas  wells.  This,  taken  in  connection 
with  other  developments  in  the  same  general  region,  was  well  calcu- 
lated to  induce  the  belief  that  they  were  the  possessors  of  a  large  and 
vvduable  gas  territory  that  should  be  promptly  developed  aud  utilized 
or  its  value  would  steadily  decline  by  reason  of  drainage  from  the 
operation  of  others.  They  could  not  utilize  their  gas  without  trans- 
porting it  to  a  market.  They  could  not  transport  it  to  advantage 
except  as  a  natural  gas  company  possessing  the  powers  conferred  by 

1  /nrvSoBllilldniteia  OoB.lfiii.Ca,      *  165F^St489;  SOAasSS. 
SSaw.SSS. 

132 


CHAP.  rV.]    fflSUAHGE  AHD  PAYMENT  OF  CAPITAL  STOCK,  §  106 


law.  This  determined  them  to  organize  a  corporation  for  the  pro- 
duction  and  transportation  of  natural  gas  and  to  transfer  their  gas 
wells  and  leases  to  the  corporation.  When  this  had  been  decided  on, 
the  first  question  to  present  itself  was,  how  shall  the  partnership  con- 
vey its  property  to  the  corporation  so  as  to  secure  to  its  members  the 
same  relative  interest  in  the  stock  of  the  corporation  they  now  have 
in  the  partnership  property?  The  next  question  was,  how  shall  we 
secure  the  necessary  working  capital  to  enable  the  corporation  to  go 
forward  with  the  work  of  producing,  transporting,  and  selling  natural 
gas?  In  a  general  way  these  questions  were  answered  by  the  adop- 
tion of  the  scheme  already  referred  to.  The  value  of  the  properties 
held  by  the  firm  was  set  down  at  * 176,000,  the  workmg  capital  needed 
at  $325, 000.  To  meet  both  purposes  the  capital  stock  of  the  eorporar 
tion  was  fixed  at  $500,000.  It  was  all  to  he  issued  as  paid  up  stock  in 
exchange  for  the  propeHy  conveyed  to  the  corporation,  subject  to  the 
agreement  that  all  except  $175,000  thereof  was  to  be  contributed  to 
the  treasury  to  be  sold  as  a  means  of  raising  the  money  needed  for  a 

working  capital. ... 

« In  what  respect,  then,  have  the  defendant  stockholders  failed  in  the 
performance  of  their  undertaking  to  the  corporation  ?  The  scheme 
was  to  turn  over  all  the  gas  wells,  leases,  etc  to  the  corporation  for 

$175,000,  and  provide  it  with  the  means  of  prosecuting  the  gas  busi- 
ness by  putting  into  its  treasury  paid  up  stocky  or  what  should  be  sold  as 
paid  up  stock,  to  the  amount  of  $325,000  more.  .  .  . 

"  The  court  below  found  '  that  the  facts  in  evidence,  connected  with 
the  fact  that  within  a  few  months  it  was  demonstrated  that  the  prop- 
erty was  of  very  small  value,  threw  on  the  stockholders  the  burden  of 
showing  clearly  that  the  sale  from  themselves  to  themselves  was  in 
good  faith  on  a  reasonable  belief  in  the  value  of  the  property.'  Bui 
what  has  the  fact  that,  after  some  months  spent  m  devdopmeni  of  their 
territory,  the  corporation  found  itself  disappointed  in  its  productiveness 
and  a  heavy  loser  in  consequence,  to  do  with  the  good  faith  of  their  pur- 
chase or  the  reasonableness  of  the  j^rice  ?- 

"  These  are  to  he  judged  of  by  the  facts  before  them  when  the  arrange- 
ment  was  made.  The  character  of  the  gas  wells  already  ojwned,  the 
extent  of  the  territory  covered  bp  the  leases^  its  relation  to  other  develop- 
ments, its  nearness  to  an  adequate  market,  and  the  probable  duration  of 
the  supply/  within  reach,  were  the  considerations  that  would  affect  ths 
judgment  of  buyers  and  sellers  and  of  the  business  public  as  to  its  vtUue. 
The  subsequent  disappointment  must  therefore  be  left  out  of  the  case,  and 
the  transaction  examined  in  the  light  m  which  it  was  seen  when  the 
arrangement  ivas  entered  into.  When  this  is  done  and  the  absence  of 
any  suggestion  or  finding  of  fraud  is  remembered,  it  is  not  easy  to  see 


§106 


RATION  AinO  OMAMIZAIION  0f  OOBPOSATIONB.  [PABt  I. 


what  there  ie  in  the  ease  to  shift  ^  burden  of  ptoof  or  to  reg[uire  the 
stockholders  to  esiaUish  the  good  faith  of  the  transaction  which  the 
pkdntiffs  have  not  aUaeked.  The  action  prooeeds  on  the  theory  that 
the  snhscriptions  to  the  capital  stock  are  wholly  unpaid.  The  proofs 
show  that  they  were  paid  exactly  in  accordance  with  the  agreement,  and 
that  this  payment  had  been  recognized  by  the  corporation  from  the 
first.  The  decree,  as  finally  made,  seems  to  rest  on  the  conclusion  that 
although  paid  they  were  paid  in  property  which  was  taken  at  too  high  a 
price.  It  is  true  that  no  such  thing  was  alleged  in  the  bill  or  shown  in 
the  proofs,  but  if  the  valae  of  the  property  ia  to  be  determined  in  the 
light  of  sobfieqnent  eTents,  a  light  which  the  parties  did  not  have  when 
this  sale  was  arranged,  the  oondiision  of  the  ooart  below  would  be 
rdasonaUe.  The  txonble  witli  it,  however,  is,  that  it  rests  on  the  in- 
trinsie  yalne  of  the  property  as  ascertained  by  actual  developments 
made  after  the  sale,  while  the  real  question  relates  to  the  apparent  value 
as  indicated  by  the  circumstances  existing  at  the  time  of  the  sale.  .  .  . 

"  We  should  agree  with  the  court  below  that  the  property  was  sold 
at  more  than  its  actual  value,  if  that  value  was  to  be  determined  by 
subsequent  results  rather  than  by  prospects  as  they  appeared  at  the 
time  of  sale.  But  if  the  parties  wm  mistaken  in  relation  to  its  Talue, 
we  do  not  see  how,  in  the  absemoe  of  my  averment  ot  hand  in  ^e 
traosaotiooy  ^t^  sale  can  be  disregarded  and  the  subscriptions  to  the 
capital  stock  treated  as  unpaid.  The  proofs  show  that  they  were 
paid  exactly  in  accordance  with  the  agreement  under  which  they 
were  made,  and  until  that  agreement  is  attacked  as  fraudulent,  the 
creditors  stand  in  no  better  position  than  the  corporation  itself.  The 
decree  is  reversed  so  far  as  it  requires  payment  of  the  stock  subscrip- 
tions or  any  part  thereof."  ^ 

So  much,  then,  for  the  question  as  to  the  proper  basis  for  ap- 
praising property  of  a  speculative  character  when  the  same  is 
transferred  to  the  oorpcNration  in  exchange  for  its  cafMtal  stock. 
Let  OS  add  a  lew  mm  wwds  to  what  was  said  in  the  foregoing 
opinion  relative  to  tiie  question  as  to  where  the  burden  of  proof 
lies  in  such  cases,  when  the  valuation  placed  upon  the  property  is 
impeached  by  creditors  who  seek  to  enforce  an  alleged  stock- 
holder's liability  for  unpaid  stock  subscriptions.  Let  lis  note  in 
this  eonaeetioii,  first,  tlie  statem^t  oi  the  law  made  by  the  Court 
ol  Ai^wals  of  Maryland  ini  Bnmdt  v,  Hilen,'  where  the  court 
observed  "we  take  the  law  to  be  well  settled,  that  a  company 

1  See  also  Kelly  v.  Clark,  21  Mont.  <  Si  IfiL  L 

291  ;  53  Pac.  959 ;  Montana  Ry.  Co. 
r.  WarieD,  6  Mont.  275 ;  12  Pac  641. 
134: 


CHAP.  IV.]    ISSUANCE  AND  PAYMENT  OP  CAPITAL  STOCK  §  106 


may  receive,  in  payment  of  the  shares  of  its  capital  stock,  any 
property  which  it  may  lawfully  purchase.   So  long  as  the  trans- 
action  stands  unimpeached  for  fraud,  the  courte  will  treat  as 
a  payment  that  which  the  parties  shall  agree  to  be  a  payment,  and 
this  too  in  cases  where  the  rights  of  creditors  are  involved."  The 
Supreme  Court  of  Massachusetts  in  a  recent  case  ^  observed  that 
it  appears  to  be  well  setUed  that  in  the  absence  of  fraud  an  agree- 
ment can  ordinarily  be  made  by  wliich  stockholders  can  be 
allowed  to  pay  for  their  shares  in  patents,  mines,  or  other  properly 
to  which  it  is  not  easy  to  assign  a  determinate  value.    At  least, 
one  court  of  high  authority  has  adopted  the  rule  that  where  one 
beoomes  a  creditor  of  a  corporation  knowing  the  manner  in  which 
its  stock  has  been  paid,  he  is  deemed  to  waive  his  right  to  assert 
that  there  has  been  an  over-valoaMcm  of  the  property  against  which 
the  corporation  issued  its  stock.*    It  is  to  go  but  a  step  for- 
ward to  say  that  in  the  case  of  corporations  engaged  in  speculative 
enterprises  it  is  a  matter  of  common  knowledge  that  shares  are  to 
/be  paid  for  io  property  appraised  at  its  potential  rather  than  its 
present  intrinsic  value,  and  that  theref<nre  the  rule  atated  above 
should  obtain,  even  in  the  absence  of  actual  knowledge  on  the  pwt 
of  creditors  as  to  the  manner  in  which  the  capital  stock  of  the 
corporation  had  been  issued.    Again,  where  stock  has  been  paid  for 
by  the  conveyance  of  property  to  a  corporation  of  the  character 
known  as  <^  specnIiUave "  and  upon  which  a  valuation  has  been 
placed,  —  not  its  present  intrinsic  value,  but  rather  its  prospective 
value  after  development  thereof,  —  then  in  such  cases  the  courts 
should  presume  that  the  valuation  was  honestly  made  and  place  the 
burden  upon  the  creditor  of  attacking  the  transfer 

The  ordinary  practice,  as  has  been  obsenred,  is  for  corporations 
engaged  in  non-speculative  enterprises  to  issue  stock  for  property 
which  has  a  well-recognized  market  value  or  one  which  can  be 
easily  ascertained.  In  regard  to  such  corporations,  where  the  nature 
and  condition  of  its  property  is  sueh  that  its  value  is  well  known  or 
undmtood  or  is  capable  of  being  readily  estimated  and  ascertained, 
and  the  same  is  transferred  to  tiie  ccwporation  at  a  gross  over- 
valuation for  paid  up  shares,  it  would  unquestionably  be  proper 

1  N.  H.  H.  N.  Co.  V,  Cot^mf,  14S  8  So.  496;  Coleman  v.  Howe,  154  111. 
Mass.  349,  7  N.  E.  773.  458  ;  39  N.  E.  725 ;  Carr  v.  Le  Fevre,  27 

2  Callanan  v,  Windsor,  78  la.  193 ;  Pa.  St.  489 ;  Shield  v.  Company,  94  Tenn. 
42N.  W.652.  123;  28  S.  W.  6(ia 

•  Davis  V.  Company,  101  Ala.  127 ; 

185 


§  106  INCORPORATION  AND  OROANIZAXION  OF  CORPORATIONS.  [PA&T  I. 

for  courts  to  treat  such  transactions  as  presumptivelj  fraudulent^ 
and  to  place  the  burden  of  proof  npon  ihe  sto<&holder8  in  such 
cases  to  rebut  such  presumption  by  clear  and  satisfactory  proof. 
On  the  other  hand,  where  the  corporation  is  engaged  in  specula- 
tive enterprises  of  the  character  above  referred  to,  and  stock  is 
issued  against  property  accepted  by  the  corporation  at  a  valuation 
not  based  upon  the  present  intrinsic  Yshne  of  the  same,  but  aroir- 
edlj  (as  is  the  nniTersd  custom)  at  its  potential  speculaliTe  value 
(to  be  determined  after  development  thereof  by  the  corporation 
which  has  acquired  the  property),  then  the  practical  attitude  for 
the  courts  to  take  in  such  cases  would  be  to  adopt  what  is  termed 
here  the  specnlatiye  value  nde,"  and  to  attach  to  the  valoation 
placed  hj  the  corporatioii  iip<m  sneh  property  the  presumption 
that  it  was  honestly  made,  and  place  the  burden  of  proof  in  such 
cases  upon  the  creditor  attacking  the  transaction.  In  practical 
operation  it  will  be  found  that  the  shifting  of  the  burden  of  proof 
would  be  equivalent  in  nearly  all  cases  to  makii^  ihe  valuation 
placed  up<m  the  property  in  any  case,  whether  (^>eenlative  or  non- 
speculative  in  character,  conclusive  respectively  upon  the  stock- 
holders and  the  creditors.  The  reason  of  this  is  that  in  the  case  of 
non-speculative  properties  it  is  easy  to  demonstrate  that  the  same 
has  been  grossly  overvalued;  as,  for  example, by  showing  the  market 
value  Off  tiie  aaiae*  Again,  in  the  case  <^  speculative  enterprises 
the  same  is  tme  for  the  reason  that  the  valuation  placed  upon  the 
properties  from  a  speculative  standpoint,  if  honest  and  fair,  would 
be  such  as  to  render  it  practically  impossible  as  a  matter  of  proof 
to  show  that  such  valuation  was  fraudulent  or  grossly  overvalued^ 
—this  for  the  reason  that  in  every  snch  case  it  will  be  found  thai 
there  exists  an  immense  margin  for  h<mest  difference  of  opinion, 
and  although  it  may  appear  that  there  were  serious  errors  of  judg- 
ment, nevertheless  it  will  be  found  in  practice  that  such  valu- 
ations should  not  and  will  not  be  set  aside  except  for  actual  fraud. 

It  is  the  reeogniti<m  of  the  necessity  of  shifting  the  burden  of 
proof  according  to  whether  ibe  property  against  which  stock  is 
issued  is  speculative  in  character  or  not,  which,  in  connection 
with  the  basis  of  appraisal  already  referred  to,  affords  a  practical 
basis  for  the  operation  of  the  speculative  value  rule,  f^inally,  the 
f oUowi^  may  be  said : 

Upon  prindple  and  in  tiie  Interest  of  justice  both  to  the  stock- 
holders and  creditors  alike,  in  determining  the  question  whether 
136 


CHAP.  IV.]    ISSUANCE  AND  PAYMENT  OF  CAPITAL  STOCK.  §  107 

stock  has  been  in  fact  fully  paid,  the  line  should  be  drawn  with 
the  utmost  clearness  and  distinctness  between  ordinary  corpora* 
tions  such  as  trading,  mercantile,  banking,  insurance,  etc,  whose 
capital  stock  is  formally  subscribed  for  and  ordinarily  paid  in  in 
cash  or  in  real  and  personal  property  having  a  well-recognized  or 
easily  established  market  value  on  the  one  hand,  and  those  cor- 
porations on  ihe  other  hand  incorporated  for  the  express  and 
avowed  purpose  of  engaging  in  speculative  enterprises  — such,  for 
example,  as  corporations  organized  to  take  over  mining  properties, 
oil  and  gas  lands,  patent  and  patent  rights,  secret  processes,  con- 
cessions, franchises,  etc.  In  this  era  of  speculative  enterprises 
the  courts  can  no  longer  remain  blind  to  the  fact  that  the  stock  of 
such  corporatimis  is  not  intended  by  the  incorporators  or  under- 
stood by  the  creditors  or  the  public  generally  to  represent  any- 
thing but  certain  property  having  a  speculative  value,  which  may 
or  may  not  ultimately  prove  to  be  worth  the  par  value  of  the  stock 
against  which  the  latter  has  been  issued.  The  credit  obtained  by 
such  corporations  concerning  which  the  courts  have  in  the  past 
displayed  such  intense  solicitude  in  the  interest  of  creditors  to  the 
exclusion  of  the  interests  of  equally  meritorious  stockholders,  is 
seldom,  if  ever,  extended  to  the  corporation  without  full  knowl- 
edge on  the  part  of  creditors  as  to  the  nature  of  the  assets  of  the 
corporation,  or  as  to  the  manner  in  which  the  stock  has  been 
issued  in  exchange  for  property  of  a  speculative  value. 

§  107.  Effect  of  Appraisal  of  Property  by  Direoton  under  BtaUb^ 

utory  Authority,  when  taken  in  Exchange  for  Stock.  —  The  incor- 
poration acts  of  Connecticut,  Delaware,  Maine,  Montana,  New 
Jersey,  New  York,  North  Carolina,  South  Carolina,  Virginia,  and 
West  Virginia  all  contain  provisions  relating  to  the  effect  of  ap» 
praisal  of  property  by  directors  when  taken  by  the  corporation  in 
exchange  for  its  capital  stock.  The  provisions  of  the  New  Jersey 
act  may  be  given  as  an  example  of  such  legislation.  The  statute 
referred  to  reads  as  follows :  ^  • 

Any  corporation  formed  under  this  act  may  purchase  mines, 
manufactories,  or  other  property  necessary  for  its  business  or  the 

stock  of  another  company  or  companies  owning  a  mine,  manufactory, 

or  producing  mills  or  other  property  necessary  for  its  business,  and 
issue  stock  to  the  amount  of  the  value  thereof,  in  payment  therefor, 

I  Public  Laws  of  New  Jersey,  1896,  chap.  85,  §  49. 

137 


§  107  mooiraufioir  im  makwoAwm  imp  o&mmkmm.  [pam  i. 


ftnd  the  stodL  so  issued  shall  be  full-paid  stock  and  not  liable  to  any 
further  call,  ma  MH  the  hxMsx  thereof  be  liable  for  any  fiurther  pay- 
ments under  any  of  the  proyisions  of  this  act,  and  in  the  absence  of 
actual  fraud  in  the  transaction  the  judgment  of  the  directors  as  to 
the  value  of  the  property  purchased  shall  be  conclusive/' 

In  commenting  upon  the  foregoing  section  in  the  case  of  Donald 
V.  Ameiican  Smelting  &  B^dmug  Co.,^  the  court  spoke  as  follows : 

**  The  distinction  between  the  contemplated  issue  of  corporate  stock 
for  property  and  its  issue  for  money  lies  not  in  the  rule  for  Yaluation^ 
but  in  the  fact  that  different  estimates  may  be  formed  of  the  Talue  of 
property.  When  such  differences  are  brought  befcnre  judicial  tribunals, 
the  judgm^t  of  Hiom  whc  are  by  law  entrusted  with  the  power  of 
issuing  stock  to  the  amount  af  the  yalue  of  the  property,  and  upon 
whom  therefore  is  placed  the  first  duty  of  valuing  the  property,  may. 
be  accorded  considerable  weight.  But  it  cannot  be  deemed  conclusive 
when  duly  subjected  to  judicial  scrutiny,  nor  is  it  necessary  that  con- 
scious over- valuation  or  any  form  of  fraudulent  conduct  on  the  part 
of  its  primary  valuers  should  be  shown  to  justify  judicial  interposi* 
tion.  Their  honest  judgment,  if  reached  without  due  examination 
of  tiie  elements  of  yalue,  or  if  based  in  part  iq[Km  an  estimale  of  mai- 
lers which  really  are  not  property,  ot  if  plainly  weighed  by  self- 
interest,  may  lead  to  a  Tiolalbn  of  the  statutory  rule  as  surely  as  would 
eormpt  motiTCS.  The  original  issue  of  corporate  stock  is  a  special 
function  in  the  exercise  of  which  the  legislature  has  fixed  the  stand- 
ard to  be  observed,  and  it  is  the  duty  of  the  courts,  so  far  as  their 
jurisdiction  extends,  to  see  that  this  standard  is  not  violated  either 
intentionally  or  unintentionally.  When  corporate  stock  has  once 
been  issued  for  property  purchased,  then  the  legislature  has  directed 
the  apfdication  of  a  different  rule.  In  the  words  of  the  statute,  *  the 
stock  so  issoed  shall  be  full-paid  Btoek,  and  not  liable  to  any  fitfther 
call,  neith^  shall  the  hxMex^bmot  be  liaUe  for  any  further  payment 
under  the  prorisions  of  this  act ;  and  in  the  absence  of  actual  fraud 
in  the  transaction  the  judgment  of  the  directors  as  to  the  value  of  the 
property  purchased  shall  be  conclusive.  Under  these  provisions,  after 
the  property  has  been  purchased  and  the  stock  issued  therefor,  noth- 
ing short  of  actual  fraud  in  the  transaction  can  impair  the  right  of  the 
holder  toiiold  his  stock  as  full-paid  stock,  free  from  further  calL"'  ^ 

1  61  N.  J.  Eq.  458  ;  48  Atl.  786.  45  W.  Va.  134  ;  30  S.  E.  92 ;  Clark  v. 

2  See  also  Wetherbee  v.  Baker,  35  N.  J.  Bever,  139  U.  S.  96 ;  11  S.  Ct.  468 ;  Fogg 
Eq.  501 ;  Bank  v.  Lumber  Co.,  32  W.  Va.  v.  Blair,  139  U.  S.  118;  11  S.  Ct  496; 
m;  S&E.  148;  KiclMUPdaoa  c  QnOumi,  IJMb  v,  Eatiipp,  79  Mo,  23. 

138 


CHAP.  IV.]   fflWCAHCT  AHD  PAWBIT  OP  CAPITAL  STOCK.          §  108 


§  108.  BBtoot  Of  Appiaiaal  ^  Value  ot  Ftop^xtj  by  State  Officials 
when  the  same  is  taken  by  CciriKnmtloiis  in  Bzolian«s  for  their 

Capital  Stock.  —  Owing  to  the  conflicting  decisions  of  the  courts 
of  the  various  States  relative  to  what  does  and  what  does  not  con- 
stitute as  against  creditors  full  payment  of  the  capital  stock  of  a 
eorporation,  attempts  have  been  made  by  the  legislatures  of 
a  number  of  the  States  to  remedy  this  situation  by  means  of  stat- 
utory enactments.    Such  legislative  enactments  may  be  said  to  bo 
indicative  of  the  public  policy  of  the  State  in  that  regard.  HiO 
"pubUc  policy  of  the  SUte,"  as  the  term  is  used  in  this  conneo- 
tion,  frequently  varies  from  time  to  time.    In  the  absence  of 
express  statutes  of  the  character  here  referred  to,  it  has  been  said 
that  it  is  not  to  be  measured  by  the  private  combinations  or  notions 
of  the  persons  who  happen  to  be  exercising  judicial  functions, 
by  reference  to  the  enactments  of  the  law-making  power,  and  in 
the  absence  of  them  to  the  decisions  of  the  courts.    When,  how- 
ever, the  legislature  has  spoken  on  a  particular  subject  and  within 
the  limits  of  its  special  powers,  its  utterance  then  becomes  tiie 
public  policy  of  the  State.^   In  view  of  the  fad  tbat  the  near 
future  is  likely  to  see  many  attempts  by  other  legislatures  to 
solve  the  question  here  referred  to  by  the  enactment  of  statutes 
governing  the  same,  the  matter  now  under  consideratiou  should 
receive  careful  attention. 

It  is  a  fair  supposition  to  say  that  the  passage  of  wiflh  sets  ia 
this  country  originated  doubtless  in  a  desire  to  transfer  to  this 
country  certain  sections  of  what  is  known  as  the  "  English  Com- 
pany's Act  of  1867."  Under  tiie  act  just  referred  to,  corporations 
which  desired  to  accept  property  in  exchange  for  their  capital 
stock  were  required  to  register  in  a  designated  government  ofltos 
a  description  of  the  property  against  which  any  particular  cor- 
poration proposed  to  issue  its  full-paid  shares.  The  construction 
by  the  English  courts  put  upon  this  section  of  the  English  Com- 
pany's Act  docs  not  seem  to  give  to  the  legislative  provision 
referred  to  the  full  effect  which  is  claimed  for  such  sttlutes  in  this 
country.  In  substance  th^  holding  of  the  English  courts  in 
this  regard  is  as  follows: 

That  where  the  property  is  so  registered  under  the  act  it  is  not 
unlawful  for  the  vendor  to  sell  such  property  to  the  corporation  in 

1  See  MacGinniss  v.  Company  (Moat),  76  Pac.  89;  United  States  v.  Association, 
166  U.  S.  290  i  17  S.  Ct.  540. 

139 


§  108  INGORPOIUIION  AND  0B6ANIZATI0H  OF  OOBPOBATION&  [PABTIL 

exchange  for  stock  having  a  par  value  in  excess  of  what  the  vendor 
paid  for  the  property.  That  ordinarily  the  court  will  not  in  the  ' 
interests  of  stockholders  or  creditors  go  behind  the  contract  and 
inquire  whether  the  consideration  represents  the  full  value  against 
which  thesliares  are  issued  unless  the  contract  itself  is  impeached 
or  the  consideration  m  the  face  thereof  appears  to  be  insu^ieient 
or  elusory.^ 

Turning  now  to  the  statutory  enactments  in  this  country  of  the 
same  character,  they  may  be  explained  as  follows :  In  Florida 
the  incorporation  act  there  in  force  provides  that  incorporators 
may  provide  in  the  charter  that  the  ci^ital  stock,  either  in  whole 
or  in  part,  sliall  be  payable  in  property,  labor,  or  services,  at  a 
valuation  fixed  in  the  charter.  The  latter  must  also  contain 
a  general  description  of  the  property  to  be  taken  in  exchange  for 
stock.  In  Utah  the  statute  is  very  similar  to  the  one  in  force  in 
Florida.  In  Massachusetts  the  articles  of  organization  musl  set 
forth  the  amount  of  capital  stock  to  be  issued,  the  amount  thereof 
to  be  paid  for  in  cash,  and  the  amount  thereof  to  be  paid  for  in 
property.  If  such  property  consists  of  real  estate,  its  location  and 
the  amount  of  stock  to  be  issued  therefor  must  be  stated.  If  any 
part  of  such  property  is  personal,  it  must  be  described  in  de- 
tail. The  whole  matter  is  then  submitted  to  and  passed  upon 
by  the  conmiissioners  of  corporations.  But  the  statute  makes  no 
provision  relative  to  what  the  legal  effect  thereof  shall  be  as  to 
creditors  where  the  issuance  of  stock  in  exchange  for  property  is 
approved  by  the  commissioners  of  corporations. 

Unquestionably  the  most  effective  statute  in  existence  is  to  bo 
found  in  the  Michigan  act,^  which  in  prescribing  the  requisites  of 
articles  of  incorporation  reads  in  part  as  follows:  "The  amount 
of  capital  paid  in  at  the  time  of  executing  the  articles,  which 
shall  not  be  less  than  ten  per  cent  of  the  autliorized  capital,  etc 
Such  capital  stock  may  be  paid  in  either  cash  or  in  other  property, 
real  or  personal ;  but  where  payment  is  made  otherwise  than  in 
cash  there  shall  be  included  in  the  articles  an  itemized  descrip- 
tion of  the  property  in  which  such  payment  is  made,  with  the 
valuation  for  which  such  item  is  taken,  which  valuation  shall  be 
conclusive  in  the  absence  of  actual  fraud." 

^  In  re  Wragg,  L.  R.  1  Chan.  796;       2  Sewion  Laws  o£  1903,  §  382. 
Ooregum  Gold  Min.  Co.  v.  Ropes,  61 L.  J. 
C1UUL337. 

140 


CHAP.  IV.]    ISSUANCE  AND  PAYMENT  OF  CAPITAL  STOCK.  §  109 

The  intent  of  the  legislature  wouH  clearly  appear  to  be  to 
establish  conclusively  that  the  property  received  and  accepted  by 
the  corporation  under  the  authority  of  the  State  in  exchange  for 
its  stock  constituted  a  fair  equivalent  of  the  amount  of  stock  so 
given.  It  would  seem  to  forbid  aU  claim  of  fraud  thereafter  to  be 
made,  and  to  establish  the  valuation  as  conclusive  upon  both  stock- 
holders and  creditors.^ 

§109.  Meaning  of  Non- Assessable  Stock.  — In  entering  upon 
the  subject  of  non-assessable  stock  as  contrasted  with  full-paid 
stock  the  discussion  of  the  former  will  be  confined  to  ques- 
tions arising  between  the  corporation  and  its  stockholders,  while 
the  latter  will  be  discussed  from  the  standpoint  of  the  stock- 
holder in  his  relation  to  creditors.  It  is  unquestionably  within 
t^e  power  of  a  corporation  to  agree  with  stockholders  that  stock 
shall  be  issued  to  them,  at  less  than  par,  and  that  when  so  issued 
shall  not  be  subject  to  any  further  assessments  on  the  part  of  the 
corporation.^ 

'  In  West  Virginia,  Nevada,  Wyoming,  and  other  States  this 
principle  has  found  recognition  in  the  incorporation  acts  in  force 
in  those  Commonwealths.   The  West  Virginia  act  wiU  serve  as 
a  fair  example.   The  law  there  provides  in  sahstanoe  as  foUows : 
that  upon  the  vote  of  three-fourths  of  the  stockholders  corporate 
stock  jnay  be  sold  or  disposed  of  at  less  than  par.    The  act  then 
goes  on  to  provide  that  nothing  therein  contained  shall  be  con- 
strued as  to  prevent  any  mining  or  manufacturing  company  from 
issuing  stock  and  negotiating  the  sale  of  the  same  in  payment  of 
real  and  personal  estate  for  the  use  of  the  corporation  at  such  price 
and  upon  such  terms  and  conditions  as  may  be  agreed  upon  by  the 
owners  and  directors  or  stockholders  of  the  corporation,  and  any 
subscriber  to  the  capital  stock  of  any  such  corporation  may  pay 
for  the  same  by  the  transfer  and  conveyance  to  such  corporation 
of  real  or  personal  property  upon  such  terms  as  may  be  mataall|' 
agreed  upon.    All  stock  so  issued  shall  be  full  paid  and  not  liable 
^  to  any  further  call  or  assessment. 

Stt<^  a  statute  as  is  here  referred  to  unquestionably  has  the  eff  ect 
of  making  the  stock  non-assessable  as  between  the  corporation 
and  the  subscribers  to  its  capital  stock,  but  it  clearly  has  not  the 
effect  of  preventing  subsequent  creditors  in  case  of  insolvency 


1  See  State  ».  Webb  «t  d,,  110  Ala.  «  Iigwi».  8mitli,ll«l£.18;  84H.  W. 
ft4;  908(k4«S.  . 

141 


§  110  INCOBPORATION  AND  ORGANIZATION  OF  CORPpBATIONS.  [PABTI. 

compelling  the  payment  of  any  unpaid  balance  on  such  stock.i. 
On  this  subject  Judge  Showalter,  in  Northern  Trugfc  Oo.  v.  Calim- 
bia  Straw  Paper  Ck>.,^  spoke  as  felloirs : 

''Whateyer  may  haTS  been  in  fset  the  vslne  of  the  property 
tamed  over  to  the  company  for  its  stoek,  the  latter  i^;reed  to  take 
it  for  the  stoek.  The  persons  interested  were  the  stockholders,  and 
there  was  no  dissent  on  the  part  of  any  person  in  what  was  done. 
Neither  any  person  then  holding  stock,  nor  any  person  who  afterwards 
became  a  stockholder  by  assignment  from  one  who  then  held  the  stock,, 
can  now  make  complaint  on  behalf  of  the  corporation  against  tlie  law- 
fulness of  that  transaction.  This  I  take  to  be  the  settled  law  on , that 
subject." 

In  the  absence  of  statutory  an^nty  ocmferred  upon  the  corpo- 
rttioD  cnr  in  the  absence  of  nnanimons  consent  of  all  the  stock- 
holders, it  is  clear  that  the  directors  of  a  corporation  have  no 
power  to  assess  sliares  which  have  been  fully  paid  up.s 

§  1 10.  Meaning  of  Pull-Paid  Stock.  — Tlie  term  "  full-paid  stoek  " 
as  here  used  oiay  be  defined  to  be  stodc  whose  par  valne  has  been 
paid,  either  in  cash  or  in  property,  the  ownership  of  which  does 
not  subject  the  holder  thereof  to  any  further  liability  either  to 
the  corporation  or  to  the  creditors.  The  mere  declaration  that 
stock  is  full  paid,  either  by  resolution  or  by  stamping  npon 
the  stock  this  statementi  does  not  make  it  so,  at  least  as  to 
ereditors.^ 

It  has  already  been  said  that  stock  may  be  issued  for  less  than 
its  par  value  to  subscribers  as  full  paid  and  non-assessable  and  be  ' 
binding  as  between  the  corporation  and  the  stockholders.^  Where 
statutes  exist  declaring  that  stock  issued  in  a  particular  manner 
shall  be  full  paid  and  non-assesfeable,  they  are  merely  to  be  con- 
stmed  to  the  effect  that  stock  may  be  issued  in  this  manner,  and 
that  the  holders  thereof  shall  not  be  held  liable  to  further  calls  or 
assessments  on  the  part  of  the  corporation,  but  such  immunity 

1  The  Wyoming  statnte  would  appear  Pacific  Fruit  Co.  v.  Coon,  107  Cal.  447; 

to  be  mateiiaUjcliffntiiAfiMMi  tila  West  40Pac  54S. 

Virginia  and  Nevada  aeti.  *  Upton  v.  Tribleeodc,  91  U.  8. 845 ;  iS 

«  75  Fed.  936.  L.  E.  203;  F.  N.  Bank  v.  Companv,  43 

8  Wells  V.  Company,  90  Wis.  442 ;  64  Minn.  327 ;  44  N.  W.  198;  National  Tube 

N.  W.  69 ;  Ventura,  etc.  Ry.  Co.  v.  Hart-  Works  v.  Gilfillan,  124  N.  Y.  302 ;  26 

man,  116  CaL  260 ;  48  Pac.  65 ;  Handley  N.  E.  538 ;  Kroenert  v,  Johnston,  19  Wash. 

v.Stiita,a9n.S.4l7;  llS.Ct530;  Gaiy  96;25Pac605. 

9.  Onpny,  eUtriw4«4;  SS  Bm.  494;  *  8m  8eovffle  9.  Thayer,  lOS  U.  &  141^ 
1« 


I 


V 


CHAP,  nr.]    ISSUANCE  AND  PAYMENT  OF  CAPITAL  STOCK.  §  HO 

will  not  be  extended  in  such  suit  so  as  to  prevent  subsequent 
creditors  enforcing  their  claims  for  the  payment  of  the  unpaid 
residne.!  Many  of  the  States  have  statutorj  provisions  to  the 
effect  that  no  corporation  shall  issue  stock  except  for  money  |Mld, 
labor  done,  or  property  actually  received,  declaring  all  fictitions 
increase  of  stock  to  be  void.  Under  such  provisions  an  original 
issue  of  stock  as  fully  paid  at  less  than  par  will  be  held  to  be 
Y0id.« 

Many  cases  will  be  found  bearing  upon  tiie  question  as  to  the 

validity  of  so-called  "  bonus  "  or  "  promotion  stock.**  In  regard  to 
the  validity  of  such  stock  the  courts  differ.  One  line  of  decisions 
is  represented  by  the  courts  of  New  York  and  Massachusetts.  In 
Ohristensen  v.  the  New  York  Court  of  Appeals  spoke  as 
follows : 

« It  may  be  admitted  that  the  liability  of  subserihers  on  unpaid 
stock  subscriptions  constitutes  an  asset  of  the  corporation  which  can- 
not be  given  up  by  the  corporation  without  consideration  on  the  x»rt 
of  creditors.  The  unissued  shares  of  a  corporation  are  not  assets. 
When  issued,  they  represent  the  proportionate  interest  of  the  share- 
holders in  the  corporate  property,  —  an  interest,  however,  subordinate 
to  the  claims  of  creditors.  There  are  unquestionably  public  evils 
growing  out  of  the  cxeation  and  multiplication  of  shares  of  stock  in 
corporations  not  based  upon  corporate  property.  The  remedy  is  with 
the  legislature.  But  the  lial»lity  of  a  shaieholder  to  pay  for  the 
stock  does  not  arise  out  of  his  relation,  but  depends  upon  his  eon» 
tract,  express  or  implied,  or  upon  some  statute,  and  in  the  absence  of 
either  of  these  grounds  of  liability,  we  do  not  perceive  how  a  person 
to  whom  shares  have  been  issued  as  a  gratuity  has  by  accepting  them 
committed  any  wrong  upon  the  creditors  or  made  himself  liable  to 
pay  the  nominal  ism  of  the  shares  as  upon  his  subscription  or 
contract'*^ 

On  the  other  hand,  courts  of  almost  equal  authority  have  refused 
to  treat  such  stock  in  the  interest  of  creditors  as  ML  paid  and  non- 
assessable, and  have  enforced  in  their  favor  an  alleged  stockholders' 

1  Vt  Marble  C©.^.€k»iipaiij,  135  Cal  Cal.  624;  87  Pac.  638;  Kellerman  v, 

•  679 ;  67  P*c  1057.  Maier,  116  Cal.  46 ;  48  Pac.  377  ;  Garrett 

a'wUliams  v.  Evans,  87  Ala.  725;  6  v.  Company,  113  Mo.  330  ;  20  S.  W, 

So.  702 ;  Perry  v.  Mill  Co.,  93  Ala.  364 ;  965. 

9  So.  217  ;  Beitman  v.  Steiner,  98  Ala.  »  106  N.  Y.  97  ;  12  N.  B.  648. 

241 ;  13  So.  87 ;  Stein  v.  Howard,  65  Cai  «  Same  rale  in  N.  H.  H.  N.  Go.  «. 

616:  4  Fac662i  Jdtooa  «.  Hewitft»  103  CoMpioy,  14SMmu  849;  7  N.  V.  77a. 

148 


§  110  INCORPORATION  AND  ORGANIZATION  OP  COBPORAUONS.  [PABTI. 

liability  thereon.i  It  has  been  held,  liowever,  that  even  though  a 
stockholder  has  paid  nothing  for  his  stocky  he  is  entitled  to  rote 
the  same.' 

1  See  Peninsula  Savings  Bank  v.  Com-  N.  W.  894  ;  Scoville  v.  Thaver.  105  U  S 
pany  105  Mich.  535;  63  N.  W.  514;  143;  Garrett  v.  Company/ll3  Mo.  330- 
Handley  Sliiti,  139  U.  S.  417;  11  S.  20  S.  W.  965.  ' 
Ct.  530;  De  Lm  Vei|pie  Mrigmtiog  •  Cwlwright  v.  Dickinson,  88  Temi. 
Machine  Co.  v.  German  Savings  Institu-  476;  12  S.  W.  1030;  W.  E.  L.  Ca  » 
tion  175  U.  S.  40 ;  20  S.  Ct.  20 ;  44  L.  E.  Landy,  66  Vt  248;  29  AtL  248:  lee  al«i 
65;  liogers  v.  Gros^  67  MiasL  224;  69  Biuey  v. Hooper, SS lU.  !«. 


CHAP,  y.]  LEGISLATIYE  CONTROL  OTEB  DOMBSTIC  COBFOBATIONS.  §  112 


CHAPTER  V. 

tSmrSLATTVE  OONTBOIi  OYEE  BOMBSXIO  OOEFOBATIOm 

§  111.  StetMmit  €ff  FfeinoiiMl  MMiiods  bj  wMeli  IitciaUiftlvo 
CJontrol  over  DomMtlo  Ck>rporatioii8  Is  obtained.  —  Under  onr 

modern  system  legislative  control  over  domestic  corporations 
ordinarily  takes  the  following  forms,  to  wit:  (1)  control  over 
amendment  of  corporate  charters;  (2)  reservation  on  the  part 
of  the  State  of  the  right  to  repeal  all  charters;  (8)  control 
over  dissolution  of  corporations;  (4)  by  ike  exercise  throngh 
State  officials  of  the  right  to  forfeit  charters  by  means  of  quo 
warranto  proceedings;  (5)  by  means  of  the  exercise  of  the 
police  power;  (6)  through  legislative  investigation  into  corpo- 
rate affairs;  (7)  by  requiring  annual  reports  of  corporations; 

(8)  by  compelling  corporations  to  permit  inspection  of  their 
books  and  records  for  the  benefit  of  stockholders  and  creditors ; 

(9)  by  means  of  anti-trust  legislation ;  (10)  by  the  enactment  of 
statutes  regulating  the  internal  affairs  of  the  corporation  ;  (11)  by 
the  imposition  of  liability  upon  stockholders  for  corporate  debts 
over  and  beyond  their  liability  for  unpaid  stock  subscriptions; 
(12)  enactment  of  statutes  imposing  liability  upon  directors  for 
misfeasance  or  non-feasance  in  office ;  (13)  by  means  of  legisla- 
tive control  over  the  extension  of  corporate  existence ;  (14)  by 
the  exercise  of  the  right  of  taxation  upon  corporations ;  (15)  by 
regulating  the  right  of  consolidation  of  corporations. 

§  112.  AmendBMat  of  duurten. — A  glance  at  ^ke  general 
business  acts  in  force  in  the  several  States  and  Territories  will 
serve  to  show  that  in  all  of  them  more  or  less  attention  has  been 
paid  by  the  legislatures  to  the  question  of  the  right  to  amend  — 
with  more  or  less  freedom — articles  of  incorporation.  In  a  ma- 
jority of  these  the  power  of  amendment  will  be  found  to  be  prac- 
tically unlimited.  In  nine  the  limitations  imposed  are  not  wide  in 
scope,  while  in  eleven  the  power  referred  to  may  be  characterized 

145  . 


§  112  IMOCttKttAlION  AKQ  OBQAVlZiLTKm  Or  OOUmATIONS.  [PABTL 

as  being  very  nanow  in  its  praetieal  operation.^  The  practical 

questions  to  be  considered  in  this  immediate  connection  have 
reference,  first,  to  ascertaining  in  what  body  the  legislatures  have 
seen  fit  to  place  the  power  of  amendment,  and,  secondly,  an  inquiry 
whether  the  power  when  granted,  apparently  in  tiie  broadert 
terms,  is  in  legal  effect  without  any  limitations  whatsoever. 

As  a  general  rule,  the  directors  have  no  power  to  amend  charters 
unless  such  right  is  expressly  conferred  upon  them  by  statute. 
^ower  to  amend  resides  exclusively  in  the  stockholders.^  Turn- 
ing now  to  the  seeimd  inqniiy  referred  to  above,  the  following  may 
be  said.  Wii&  reiqieet  to  right  on  tiie  part  id  majority  stock- 
holders to  exercise  the  power  of  amendment,  there  are  two  prac^ 
tical  views  of  the  question  which  deserve  consideration.  The  first 
has  reference  to  the  effect,  if  any,  the  exercise  of  such  right  may 
have  upon  the  right  of  the  corporation  to  enforce  stock  subscrip> 
Mons  which  were  made  in  relianee  iqxm  tbe  corporate  purposes 
set  forth  in  ^  original  charter.  The  other  relates  to  the 
binding  effect  of  such  amendments,  when  had,  upon  dissenting 
minority  stockholders  who  have  previously  paid  up  their  stock 
subscriptions. 

In  the  first  ease  it  appears  to  be  the  generally  accepted  view 
tiiat  when  a  party  makes  a  subscription  to  the  capital  stock  of  a 

corporation  he  does  it  in  reliance  upon  the  implied  understanding 
that  no  changes  shall  be  made  in  the  charter  without  his  consent 
which  produce  material  and  fundamental  changes  therein.^  The 
rule  however  can  clearly  not  apfdy  where  the  changes  made  were 
tilMng  or  immaterial  or  were  in  ftirthenmce  of  the  original  objects 
of  the  corporation.*  There  is  a  well-defined  tendency  at  the 
present  time  on  the  part  of  many  courts  to  take  the  view  that  in 
order  that  a  subscriber  to  the  capital  stock  may  escape  liability 
on  his  subscription  on  the  gronnd  that  there  has  been  a  material 
amendment  to  the  dbarter  since  his  subscription  was  made,  that 

1  Sm  FSut  n,  Synoptis-Digest  of  tiie  13S ;  Abliotk  v,  Companj,  SSBwb.  (N.  T.) 
Cotpontioii  AdB  of  the  Several  Stetet,  583. 

under  the  head  "  Amendments."  ^  Mowrey  v.  Company,  4  Bissell  (U.  S.), 

2  Gill  V.  Bayless,  72  Mo.  424 ;  Ry.  Co.  78 ;  Printiiig  Home  v.  Tniiteee,  104  U.  S. 

V.  AUerton,  18  Wall.  U.  S.  233;  Olleshei-  711. 

mer  v.  Mfg.  Co.,  44  Mo.  Ap.  172 ;  Clongh       *  Fry's  Executors  i?.  Company,  2  Met- 

9.  Company,  SS  CoL  520;  55  Pm.  809;  calf  (Ey.),  322 ;  Peoria  v.  FMoo,  35  la. 

State  9.  Oftedal»  72  Ifimi.  488  ;  75  N.  W.  115  Milfoid,  ete.  Tnnipike  Co.  v,  Bnuh, 

•M;  CoouBMiirMllliv.  CDBeD,13B».8l.  10  0.  St  111;  Dmfee  v.  Conpanj,  S 

SiO. 

146 


CHAP,  v.]  LEOISLATrTB  CONTROL  OTEB  DOMEBflO  OOBPOSAflOllS.  §  112 

such  amendment  must  necessarily  have  brought  about  changes 
of  the  most  radical  and  fundamental  character.^ 

Turning  now  to  the  second  question  here  referred  to,  the  fol- 
lowing may  be  said.  Important  questions  frequently  arise  as  to 
the  right  of  majority  stockholders  to  amend  tiie  charter  of  the 
corporation  against  the  dissent  of  minority  stockholders  so  as 
practically  to  create  an  entirely  new  corporation  with  purposes 
and  powers  wholly  difEerent  from  those  conferred  in  the  original 
<diarter. 

Before  the  passage  of  the  modem  liberal  amendment  aels, 

specifically  authorizing  majority  stockholders  to  change  ad  WnHim 
corporate  purposes  and  powers,  the  rule  undoubtedly  was  that 
majority  stockholders  had  no  power  to  depart,  under  the  guise  of 
an  amendment  to  the  charter,  from  the  objects  for  the  accom- 
plishment of  which  the  corporation  was  created.  At  that  time 
majority  stockholders  would  be  enjoined  on  the  application  of 
minority  stockholders  from  making  fundamental  and  radical 
changes  in  the  original  corporate  purposes,  which  liad  the  effect 
of  practically  creating  a  new  corporation,  with  power  to  engage 
in  lines  of  business  wholly  foreign  to  that  set  forth  in  the  (uriginal 
charter.'  But  whatever  the  rule  may  have  been  in  Mmes  past* 
changed  conditions  have  brought  about  material  modifications 
therein. 

Owing  to  the  recent  statutory  enactments  in  the  great  majority 
of  the  Commonwealths  relative  to  amendment  of  charters,  it  may 
be  said  that  this  question  has  ceased  to  be  one  of  great  practical 
importance  at  the  present  time,  however  it  may  have  been  in  the 
past.  In  view  of  these  statutory  provisions  it  may  be  said  that  as 
a  general  rule  the  extent  of  the  power  of  amendment  when  exercised 
by  a  majority  of  the  stockholders  according  to  the  statute  in  such 
case  made  and  provided,  depends  entirely  up<m  the  terms  of  such 
statute  and  the  construction  given  by  the  courts  thereto.'  If  broad 

1  Banet  v.  Company,  13  111.  504 ;  Pa-  Natusch  v.  Irving,  1  Smith's  Cases,  226 ; 

cific  Ry.  Co.  V.  Renshaw,  18  Mo.  210;  Union  Locks  and  Canals  t;.  Towne,  1  N.  H. 

Spragae  v.  Company,  19  Dl.  174;  Irrine  44 ;  Ashton  v.  BotlMUik,  8  DUL  495;  Fed. 

V.  Turnpike  Ck».,  S  Fta.  &  W.  (P^)  466;  CsMt  No.  582;  H.  &  N.  H.  By.  Go.  «. 

Cross  V.  Company,  90  Pa.  St.  392 ;  Troy,  Croswell,  5  Hill  (N.  T.),  383. 

etc.  Ry.  Co.  v.  Kerr,  17  Barb.  (N.  Y.)  »  Day  v.  Company,  75  la.  694;  38 

607;  Worcester  v.  Company,  109  Mass.  N.  W.  113;  Colder  v.  Bressler,  105  111. 

103;  Del.  Ry.  Co.  v.  Tharp,  1  Houst.  419;  Sprigg  v.  Company,  46  Md.  67 ;  Hope 

(Del.)  149.  Mutual  Fire  Ins.  Co.  v.  Beckman,  47 

*  Zsbriskie  v.  Company,  18  N.  J.  Eq.  Mo.  93;  Detroit  Chamber  of  Govmerce  v. 

17S;  8l»T«iie  v.  Coa^K^»  SS  Yt;  54^;  B&amxf  of  SCttte,  109  JHeh.  <91;  if 

U7 


J 


§  112  INCORPORATION  AND  OBGANIZATION  OP  COEPORATIONS.  [PABT  I. 

in  seope,  they  unquestionably  permit  majority  stockholders  to 
bring  about  radical  and  even  fundamental  changes  in  corporate 
purposes  and  powers  if  they  so  desire. 

The  qaettbn  here  i^resented  is  one  of  so  maeh  practical  im- 
portance that  it  deserrea  more  attention  than  has  heen  yet  given 
it.  The  New  York  Conrt  of  Appeals  in  Buffalo  &  New  York  City 
Railroad  Co.  v.  Dudley  ^  laid  the  foundation  for  the  establishment 
in  that  State  of  the  present  just  rule  that  there  obtains  with 
reference  to  the  right  of  migority  atockholders  to  materially 
change  the  corporate  parposes  ^^ainat  the  dissent  of  minority 
atockholders.  In  that  case  the  court  permitted  a  change  of  name 
and  an  extension  of  the  line  of  the  railway  by  means  of  an  amend- 
ment to  the  original  chai'ter.  In  passing  upon  this  point  the 
court  spoke  as  follows : 

*^  The  stock  subscription  having  been  ralid  so  as  to  give  a  right 
of  action  in  ease  of  non-pajment  to  the  corporation,  did  the  altera- 
tion of  the  ehartw  and  the  extension  of  the  road  subsequently  absolve 
the  defendant  fxcm  his  liability  upon  such  subscription  ?  The  right 
to  alter  was  reserved  in  the  barter,  and  the  subscription  must  be 
taken  to  have  been  made  subject  to  having  such  additional  powers 
conferred  as  the  legislature  might  deem  essential  and  expedient. 
The  change  is  not  fundamental.  The  new  powers  conferred  are 
identical  in  kind  with  those  originally  given.  They  are  enlarged 
merely,  the  general  objects  and  purposes  of  the  corporation  remain- 
ing still  the  same.  It  may  be  admitted  that  under  this  reserved 
power  to  alter  and  repeal  the  legislature  would  have  no  right  to 
change  the  fundamental  dmracter  of  the  eorporation  and  convert  it 
into  a  different  legal  being,  for  instance,  a  banking  corporation, 
without  absolving  those  who  did  not  choose  to  be  bound.  But  this 
they  have  not  attempted  to  do.  The  additional  powers  are  of  the 
same  character  and  have  been  regularly  acquired  from  a  legitimate 
source  of  power,  and  if  they  had  been  fairly  exercised  the  defendant, 
although  the  change  may  have  operated  to  his  pecuniary  disadv^- 
tage,  is  still  bound  by  his  undertaking.  The  whole  matter  is  mani- 
festiy  a  question  of  power;  and  if  the  .power  was  legitimately 
acquired  and  kas  be^  exereised  without  fraud,  the  rights  of  the 
parties  are  in  no  respect  changed  as  between  themselves  whether 
the  alteration  k  braeficial  or  injurious  to  the  d^endant's  interest. 

H.  W.  897;  Mescastile  Statemeat  Co.  Feoplev.  Giwb,  116  lOdi.  806;  74N.  W. 
«.  Kaeal,  61  Miu.  S6t;  5S  N.  W.  682;  714. 

1  UK  Y.MS. 

148 


CHAP,  y.]  immiikwrf^  comtbol  oyeb  domestic  coBPOfiAiioiis.  §  112 

Whether  he  has  made  or  lost  by  the  change  in  no  respect  affects  thf 
question  of  authority  in  the  plaintiff.'' 

Many  years  later  this  same  court,  in  discussing  the  respective 
rights  of  majority  and  minority  stockholders  or  corporationSi  spoke 

as  follows : 

"The  court  would  not  be  justified  in  interfering  even  in  doubtful 
cases,  where  the  action  of  the  majority  might  be  susceptible  of  dif- 
ferent constructions.  To  warrant  the  interposition  of  the  court  in 
favor  of  the  minority  shareholders  in  a  corporation  or  joint- stock 
association,  as  against  the  contemplated  action  of  the  majority,  where 
such  action  is  within  the  corporate  powers,  a  case  must  be  made  out 
which  plainly  shows  that  smih  action  is  so  far  opposed  to  the  trwi 
interests  of  the  corporation  itself  as  to  lead  to  tiie  dear  inference 
that  no  one  thus  acting  could  have  been  influenced  by  any  honest 
desire  to  secure  such  interests,  but  that  he  must  have  acted  with  an 
intent  to  subserve  some  outside  purpose,  regardless  of  the  conse- 
quences to  the  Company  and  in  a  manner  inconsistent  with  its 
interests.  Otherwise  the  court  might  be  called  upon  to  balance  prob- 
abilities of  profitable  results  to  arise  from  the  carrying  out  of  the 
one  or  the  other  of  different  plans  proposed  by  or  on  behalf  of  the 
different  shareholders  in  a  corporation,  and  to  decree  the  adoption  ol 
that  line  of  policy  which  seemed  to  it  to  promise  the  best  results,  c^ 
at  least  to  enjoin  the  carrying  out  of  the  opposite  policy.  This  is  no 
business  for  any  court  to  follow."  ^ 

It  is  difficult  to  find  a  better  presentation  of  the  more  modern 
and  better  view  taken  of  the  question  now  under  discussion  than 
that  to  be  found  in  the  opinion  of  the  Massachusetts  Supreme 
Court  in  Durfee  v.  Old  Colony  k  Fall  River  Railway  Company.* 
WhUe  the  case  had  special  reference  to  the  right  of  a  State  legit* 
lature  to  exercise  its  reserved  right  to  amend  corporate  charters 
so  as  to  produce  radical  changes  in  the  purposes  named  in  the 
original  charter,  nevertheless  the  reasoning  is  equally  applicable 
to  those  cases  where  majority  stockholders  attempt  equally  radical 
amendments  nnder  general  acts  permitting  such  stockholders  to 
amend  charters  on  their  own  initiative. 

"  We  suppose,"  said  Chief  Justice  Bigelow  in  the  case  referred 
to,  <^  it  may  be  stated  as  an  indisputable  propositioni  that  every 

1  Gamble  v.  Company,  123  N.  Y.  91 ;      *  5  Allen,  230. 
S5N.  E.  201. 

149 


§112  mOOBPORATIOH  AMD  OMAmZAflOli  OW  CXMtraUTIOHB.  [PABT^ 

person  who  becomes  a  member  ol  a  corporaiion  aggregate  bj  pur- 
chasing and  holding  shares  agrees-  by  necessary  implication  that 
he  will  be  bound  by  all  acts  and  proceedings,  within  the  scope  of 
the  powers  and  authority  conferred  by  the  charter,  which  shall 
be  adopted  or  sanctioned  bjr  a  Tote  oi  the  majority  of  the  corpora- 
tion, duly  taken  and  ascertained  according  to  law.  This  is  an 
unavoidable  result  of  the  fundamental  principle  that  the  majority 
of  the  stockholders  can  regulate  and  control  the  lawful  exer- 
cise of  the  powers  conferred  on  a  corporation  by  its  charter.  A 
holder  of  shares  in  an  incOTporated  body,  so  far  as  his  indi- 
.  Tidnal  rights  and  interests  may  be  InTolTcd  in  the  doings  of  the 
corporation,  acting  within  the  legitimate  sphere  of  its  corporate 
power,  has  no  other  legal  control  over  them  than  that  which  he 
can  exercise  by  his  single  vote  in  the  meetings  of  the  company. 
To  this  extent  he  has  parted  with  his  personal  right  or  privilege 
to  regulate  the  disposition  cl  that  portaon  of  his  property  which 
he  has  invested  in  the  capital  stock  of  tlie  corporation,  and  sur- 
rendered it  to  the  will  of  a  majority  of  his  fellow  corporators. 
The  jus  disponendi  is  vested  in  them  so  long  as  they  keep  within 
the  Hne  of  the  general  purpose  and  object  lor  which  the  corpora- 
waa  eatafa^hed, although  their aetion  maybe  against  tiie  will 
of  a  minority  howeyer  large.  It  cannot,  therefore,  be  justly  said 
that  the  contract,  express  or  implied,  between  the  corporation 
and  the  stockholders  is  infringed  or  impaired  by  any  act  or  pro- 
ceeding of  the  former  which  is  authorized  by  a  majority,  and 
which  comes  within  the  terms  of  the  <Hriginal  statute  creating  and 
estaUishing  their  franduse,  and  conferring  on  them  capacity  to' 
exercise  control  over  the  rights  and  property  of  their  members. 
On  the  contrary,  the  fair  and  reasonable  implication  resulting 
from  the  legal  relation  of  the  stockholders  and  the  corporation  is, 
that  the  mi^rity  may  do  any  act  either  ccnning  within  the  scope 
of  the  corporate  an^ority,  or  which  is  consistent  wiUi  the  terms 
and  conditions  of  the  original  charter,  without  and  even  against 
the  consent  of  an  individual  member.'*  Again,  in  this  same  opinion 
the  court  observed  that,  "  in  creating  a  corporation,  no  contract 
is  made  by  the  legislature  with  the  individual  members  or  stock- 
holders, any  further  tiian  tiiey  are  represented  by  the  artificial 
body  which  the  act  of  incorporation  calls  into  being.  They  have 
no  other  rights  except  those  which  exist  or  grow  out  of  the  con- 
atitution  of  the  body  corporate  of  which  they  are  members.  To 
150 


CHAP.  T.]  LWaSLATITB  CONTBOL  OTM  DOMMTIC  COEPOBATIONS.  §  112 

this  can  we  only  look,  in  order  to  ascertain  whether  there  has 
been  any  breach  of  contract  or  vioktion  of  chartered  rights.  It 
constitutes,  of  itself,  the  contract  by  which  the  righto  of  aU  parties 
are  to  be  governed.   When,  therefore,  it  is  expressly  provided 
between  the  legislature  on  the  one  hand  and  the  corporation  on 
the  other,  as  part  of  the  original  contract  of  incorporation,  that 
the  former  may  change  or  modify  or  abrogate  it  or  any  portion 
of  it,  it  cannot  be  said  that  any  contract  is  broken  or  infringed 
when  the  power  thus  reserved  is  exercised  with  the  consent  id  the 
artidcial  body  of  whose  original  creation  and  existence  such  reser- 
vation formed  an  essential  part.    The  stockholder  cannot  say 
tliat  he  became  a  member  of  the  corporation  on  the  faith  of  an 
a<rreement  made  by  the  legislature  with  the  corporation,  that  the 
original  act  of  incorporation  should  undergo  no  change  exeept 
with  his  assent.    Such  a  position  may  be  asserted  with  more 
plausibility,  if  there  was  an  absence  of  a  clause  in  the  original 
act  of  incorporation  providing  for  an  alteration  in  its  terms.  In 
such  a  case  it  might  perhaps  be  maintained  that  there  was  a 
strong  implication  that  the  charter  should  remain  inviolate,  and 
that  the  holders  of  shares  invested  their  property  in  the  corpora- 
tion relying  upon  a  contract  entered  into  between  it  and  the 
legislature  that  the  provisions  of  the  act  creating  it  should  remain 
unchanged.   But  it  is  difficult  to  see  how  such  a  construction  can 
be  put  on  a  contract  which  contdna  an  express  stipulation  that  it 
shall  be  subject  to  amendment  and  alteration.   If  it  be  asked  by 
whom  such  amendment  or  alteration  is  to  be  made,  the  answer 
is  obvious :  by  the  parties  to  the  contract,  the  legislature  on  the 
one  hand  and  the  corporation  on  the  other ;  the  former  expressing 
its  intention  by  means  of  a  legislative  act,  and  the  latter  assenting 
thereto  by  a  vote  of  the  majority  of  the  stockholders,  according 
to  the  provisions  of  its  charter.    It  is  nothing  more  than  tiie 
ordinary  case  of  a  stipulation  that  one  of  the  parties  to  a  contract 
may  vary  its  terms  with  tiie  assent  of  the  other  contracting  party. 
In  such  case,  all  persons  claming  derivative  rights  or  interests 
under  the  original  contract,  with  notice  of  its  terms,  would  be 
bound  by  the  amendment  or  alteration  to  which  the  parties  should 
agree.    It  is  a  mistake,  therefore,  to  say  that  the  contract  of  a 
stockholder  with  a  corporation  established  under  our  statutes 
bmds  the  latter  to  undertake  no  new  enterprise  and  engage  in  no 
business  or  operation  other  than  that  contenq[>lated  by  the  original 

161 


§  112  nrooBpOEATioN  Am  imiuxiumoK  of  oonpo&ATioim.  [pabt  h 

eharter.  This  inteipretatian  pati  aside  the  express  proyision 
authorizing  an  amradment  or  alteration  (rf  the  act  <^  incorporation, 
and  gives  it  no  effect  as  against  a  stockholder  without  his  assent, 
although  he  bought  his  stock  or  subscribed  for  his  shares  subject 
to  the  legal  effect  of  such  a  stipulation.  The  real  contract  into 
which  the  atockh<^der  ^ters  with  the  corporation  iS|  that  he 
agrees  to  beoome  a  memto  <^  an  artificial  body  whidi  is  created 
and  has  its  existence  hj  virtne  of  a  contract  with  the  legislature, 
which  may  be  amended  or  changed  with  the  consent  of  the  com- 
pany, ascertained  and  declared  in  the  mode  pointed  out  by  law. 
Having,  by  virtue  of  the  relation  which  subsists  between  himself 
and  the  corporation  as  a  holder  of  shares,  assoited  to  the  terms 
of  the  original  act  of  incorporation^  he  cannot  be  heard  to  say 
that  he  will  not  be  bound  by  a  vote  of  the  majority  of  the  stock- 
holders accepting  an  amendment  or  alteration  of  the  charter 
made  in  pursuance  of  an  express  authority  reserved  to  the  legis- 
latnie,  and  which  by  sudi  aooeptanee  has  become  buiding  on  the 
oorporation.'' 

In  some  few  of  the  States,  as  for  example  Ohio,^  the  law  provides 
that  no  amendment  shall  change  substantially  the  original  pur- 
poses of  the  organization.  In  many  of  the  States  great  similarity 
is  to  be  observed  in  the  fcnrmalities  necessary  to  be  taken  in  ord^ 
to  l^lly  am^  the  charter,  tlsiially  the  matter  is  brought  to 
the  attention  of  the  stockholders  by  a  resolution  passed  by  the 
board  of  directors  directing  the  calling  of  a  meeting  of  the  stock- 
holders for  the  purpose  of  passing  upon  certain  proposed  amend- 
ments. A  meeting  of  the  stockhdders  is  then  called  in  the  manner 
prescribed  by  sta^e,  if  any,  or  aecordmg  to  tiie  method  set  forth 
in  the  by-laws.  If  the  requisite  nnmber  of  stockholders  vote  in 
favor  of  such  amendment,  a  certificate  to  that  effect  is  usually 
made  by  the  officers  of  the  corporation  and  filed  in  the  same  offices 
as  is  required  in  the  case  of  the  original  articles  of  incorporation. 
Thereupon  the  amradment  ordinarily  becomes  effective.  If  the 
statute  does  not  prescribe  the  method  of  amending  the  charter, 
the  only  safe  plan  to  pursue  is  to  adopt  substantially  the  same 
procedure  therefor  as  is  prescribed  by  statute  in  the  case  of  original 
articles.^ 

^  See  Hevised  Statutes  of  Ohio,  sec.       ^  Day  v,  riWJplliJ,  7S  Is.  SM;  SS 

3258a ;  also  State  v.  Taylor,  55  0.  St.  61;   N.  W.  113. 
Picard  i;.  Hughey,  58  0.  St.  577. 

152 


CHAP,  v.]  LBOIga-ATIVB  C(»mK)L  OTER  WMESTIG  COBPOBATIONS.  §  113 

§118.  Reserrsd  Hl^  Of  ti»  State  to  repeal  cai«i»fs. — 

exception,  under  the  system  of  incorporation  now  in  vogue,  each 
of  the  several  States  and  Territories  reserves  the  right  in  the  grant- 
ing of  corporate  charters  under  general  acts  to  alter,  amend,  or 
repeal  the  same  at  any  future  time.    The  presence  of  such  enact- 
ments is  due  to  the  decision  of  the  United  States  Supreme  Court 
in  Dartmouth  College  v.  Woodward,^  wherein  that  tribunal  an- 
nounced the  principle  that  the  charter  of  a  private  corporation 
was  entitled  to  protection  from  alteration,  amendment,  or  repeal 
m  the  part  of  State  legislatures  under  the  clause  of  the  Federal 
Constitution  forbiddmg  impairment  of  the  obligation  of  contracts. 
When  this  case  was  decided,  it  became  obvious  at  once  that "  many 
acts  of  incorporation  which  had  been  passed  as  laws  of  a  public 
character,  partaking  in  no  general  sense  of  a  bargain  between  the 
SUtes  and  the  corporations  which  they  created,  but  which  yet  con- 
ferred private  rights,  were  no  longer  subject  to  alteration,  amend- 
ment, or  repeal  except  by  the  consent  of  the  corporate  body,  and 
that  the  general  control  which  the  legislatures  creating  sudi 
bodies  had  previously  supposed  they  had  the  right  to  exercise,  no 
longer  existed."    It  was  no  doubt  with  a  view  to  suggesting  a 
method  by  which  the  State  legislatures  could  retain  in  a  large 
measure  this  important  power  without  violatung  the  provisions  of 
the  Federal  Constitution,  that  Justice  Story,  in  his  concurring 
opinion  in  the  Dartmouth  College  Case,  suggested  that, "  when  the 
legislature  was  enacting  a  charter  for  a  corporation,  a  provision 
in  the  statute  reserving  to  the  legislature  the  right  to  amend  or 
repeal  it  must  be  held  to  be  a  part  of  the  contract  itself,  and  the 
subsequent  exercise  of  the  right  would  be  in  accordance  with  the 
contract  and  could  not  therefore  impair  its  obligation."* 

With  respect  to  the  right  to  repeal,  the  power  of  the  legislature 
in  this  regard,  when  exercised,  is  all  but  absolute,  and  the  courts 
ordinarily  will  not  inquure  mto  the  legislative  motive  for  exercis- 
ing it.  IJi^er  such  curcumstances  it  will  be  presumed  that  the 
power  is  properly  exercised.*  The  only  exception  appears  to  be 
that  the  courts  will  interfere  where  the  legislature  has  exercised 
its  power  of  repeal  so  wantonly  and  causelessly  as  palpably  to 
violate  the  prindi^  o{  natural  justice.^ 

I  4  Wheaton,  518,  deddtd  in  1819.        Wagner  Free  Inalitiiliaii  «.  PhihwMpliiSj 
s  QiMirood  V.  Cmmpmy,  m  U.  &  132  Pa.  St.  612. 
13.  ^  Lothrop  et  a2.  v.  Stednuui  et  al..  Fed. 

>  Qxeenwood  v.  CompaDj,  lOd  U.  S.  13;  Cases,  No.  8519. 

153 


§  114  INOOftPCMUTION  AND  ORGANIZATION  OF  COBPOBATIONS.  [PABT  I. 

Another  question,  however,  is  presented  when  the  legislature 
attempts  to  alter  or  amend  the  charter.  In  order  to  justify  the 
exercise  of  this  power  by  the  legislature  the  same  must  be  80 
ezierciBed  as  not  to  defeat  or  Bnbstantially  in^wir  the  object  of 
ihe  grant  or  any  ri|^t8  vested  under  it  whidi  tlie  legislatnre  may 
deem  necessary  to  secare  either  that  object  or  some  public  right.^ 
From  the  foregoing  it  is  to  be  seen  that  the  reserved  power  to 
repeal  and  alter  is  not  unlimited.  On  this  subject  the  U.  S. 
Supreme  Court,  in  Union  Pacific  Railroad  Co.  v.  United  States,^ 
spoke  as  f  dlows : 

That  the  power  to  alter  or  amend  a  charter  even  when  reserved  has 
a  limit  no  one  ean  doabt  All  agree  that  it  cannot  be  used  to  take 
away  tiie  property  already  acquired  under  the  operation  of  the 
charter  or  to  deprive  the  corporation  of  the  fruits  actually  reduced 
to  possession  of  contracts  lawfully  made.  It  may  safely  be  affirmed 
that  the  reserve  power  may  be  exercised  to  almost  any  extent  to  carry 
into  effect  the  original  purposes  of  the  grant  or  to  secure  the  due 
administration  of  its  affairs  so  as  to  protect  the  rights  of  stockholders 
and  creditors,  and  for  the  proper  distribution  of  its  assets.  Also 
to  im>tect  the  rights  of  the  public  and  of  the  incorporators  or  to 
promote  the  doe  adminisfaation  of  the  a&irs  of  the  corporation. 
The  alteratioDs  must,  however,  be  reasonable.  They  must  be  made  in 
good  &ith,  and  be  eonsistent  vrith  the  object  and  scope  of  the  act  of 
incorporation.  Sheer  oppression  and  wrong  cannot  be  inflicted  under 
the  guise  of  alteration  or  amendment." 

§  114.  Legislative  Control  over  Dissolution  of  Corporations.  — 

Legislative  control  over  dissolution  of  domestic  corporations 
(omitting  any  reference  to  forfeiture  of  charters  by  State  action,) 
is  exercised  in  the  following  four  ways:  (1)  by  preseribing  the 
maximnm  duration  of  eorpmtte  charters;  (2)  by  permitting 
corporations  to  surrender  their  charters  before  organization ; 
(8)  by  authorizing  voluntary  dissolution,  with  or  without  recourse 
to  the  courts;  (4)  by  enacting  statutes  authorizing  involuntary 
dissolution  on  application  of  stockholders  or  creditors.  Each  of 
these  matters  will  now  be  taken  up  bri^y  for  discossicm. 

(1)  Legislative  limitations  upon  corporate  duration.  Tn  the 
absence  of  any  provision  in  the  governing  statute  or  in  the  charter 
limiting  corporate  duration,  the  corporation  is  entitled  to  perpetual 

1  N.  Y.  &  N.  E.  Kailiwy  Co,v.  Twm      *  M  U.a  TCQ. 
lilBnrtol,  151  U.  S.  SftS.  . 


CHAP.  T.]  taOISLATiyS  OOmWOL  0?1B  DOICfiSXIC  COBPOEATIONa,  §  114 


exlstdnce.^  Tlie  legislature  may  however,  if  it  sees  fit,  limit 
the  duration  of  corporate  existence  to  any  specific  number  of 
years.  This  right  has  been  exercised  in  a  majority  ol  tfce 
States.2  Upon  expiration  of  the  period  of  time  limited  in  the 
charter  as  the  duration  of  corporate  life,  dissolution  results  by 
operation,  of  law.*  If  the  articles  provide  for  a  longer  period 
ot  duration  tiiair  the  law  allows,  then  the  excess  is  of  no  force 
or  effect.* 

In  many  of  the  States  statutes  exist  continuing  the  existence  of 
corporations  after  the  expiration  of  the  period  limited  in  their 
charters  for  oertain  periods  of  years  in  order  to  permit  them  to 
dose  up  their  corporate  affairs.  Such  statutes  may  be  lawfully 
enacted  subsequent  to  the  creation  of  the  corporation,  for  the 
reason  that  they  provide  for  the  enforcement  of  rights  whidi 
equity  recognizes  even  in  the  absence  of  statute.^ 

(2)  Surrend^  of  charter  before  organization.  Statutes  exist 
in  the  States  of  Connecticut,  Delaware,  Maine,  Massachusetts, 
Nevada,  New  Jersey,  New  York,  North  Carolina,  Virginia,  West 
Virginia,  and  Wisconsin  expressly  permitting  corporations  to 
surrender  their  charters  either  prior  to  organization  or  to  the 
commencement  of  corporate  business.  It  is  unquestionably  true 
that  in  order  to  render  such  a  surrender  valid  it  must  have  been 
made  under  authority  of  tiie  statutory  provision  enacted,  which 
is  of  course  equivalent  to  acceptance  by  the  State.* 

(3)  Voluntary  dissolution  with  or  without  recourse  to  the 
courts.  "  Charters,"  it  has  been  said, are  in  many  respects  com- 
pacts between  the  government  and  the  corporators.  And  as  the 
former  cannot  deprive  the  latter  of  their  franchises  in  violation  of 
the  compact,  so  the  latter  cannot  put  an  end  to  the  compact  with- 
out the  consent  of  the  former.  It  is  equally  obligatory  on  both 
parties.  The  surrender  of  a  charter  can  only  be  made  by  some 
formal  act  <rf  the  corporation,  and  will  be  of  no  avail  until  ac- 
cepted by  Ifee  government  There  must  be  the  same  agreement 
*of  the  parties  to  dissolve  tiiat  there  was  to  form  the  compact  It 

1  F.  L.  &  S.  Co.  r.  Clowes,  3  N.  Y.  470.   v.  Hutchinson,  183  DL  605;  56  N.  E. 

*  See  Part  III.  Table  13,  page  583.       388.  «  ^   .  «  

•Mason  v.  Company,  25  Fed.  882;       •  Taylor ».  Holiiiei,U  Fed.  9S;  Kwr«» 

Bradley«.Reppell,188Ma.645  ;82  8.W.  ».C5Miiimoy,  15  Pick.  (Mass.)  351;  Combes, 

*  PeoplA  9  OMtMBSa,  7  Coi  87S;  S   Law  v.  Rich.  47  W.  Va.  634  ;  35  S.  E.  858  ; 
Jte.  716.       '  Mariners  v.  Sewall,  50  Me.  220 ;  Barton  v. 

»  Fofter  ».  Baffle,  16  Mass.  246 ;  Singer  Association,  lU  Ind.  226 ;  16  N.  E.  48S. 

155 


§  114  INQDBPORATION  AND  OBOAinZATION  OP  OOBPOBATIONS.  [PART  I. 


18  tlie  aeoeptanee  which  gives  efficiency  to  the  surrender.  Dis- 
solution of  a  corporation  extinguishes  all  its  debts.  The  power 
of  dissolving  itself  by  its  own  act  would  be  a  dangerous  poweTt 
and  one  which  cannot  be  supposed  to  exist."  ^ 

The  foregoing  statement  of  the  law  is  nnqoestionablf  based 
npm  both  reason  and  authority.  Accordingly,  a  corporation  may 
dispose  of  all  its  assets,  cease  entirely  to  do  business,  and  neglect 
to  elect  officers  or  hold  meetings  of  any  kind,  yet  it  cannot  be 
legally  dissolved  by  any  action  of  its  stockholders  or  a  surrender 
of  its  charter  unlesa  such  surreader  is  autbcHrtzed  by  somd 
statute.* 

Where  statutes  exist  authorizing  dissolution  of  corporations 
prior  to  the  termination  of  the  period  limited  in  their  charters, 
such  statutes  are  of  course  equivalent  to  an  acceptance  by  the 
legislature  of  the  surrender  of  the  charts.  All  tibat  u  necessary 
is  that  the  statute  abali  be  subetantially  oomplied  with  in  order 
tiiat  the  disaolution  may  be  effective.^ 

It  may  be  remarked,  in  passing,  that  no  cessation  or  abandon- 
ment of  its  corporate  business,  failure  to  hold  corporate  meetings 
or  to  elect  officers,  alienation  or  loss  all  its  property,  has  tiie 
effect  in  law  of  diss(dvmg  the  corporation.^ 

(4)  luToluntary  dissolution  on  application  of  stockholders  and 
creditors.  Most  of  the  States  have  enacted  statutes  giving  courts 
possessing  equitable  powers  the  right  to  wind  up  corporations  for 
€ause  shown  upon  applicatiwi  of  some  stockholder  or  on  petition 
of  creditors.  But  such  jHrooeedinga,  even  when  the  corporation  is 
insolvent,  dp  not  necessarily  dissolve  the  corporation,  unless  the 
statute  that  is  invoked  expressly  so  provides.* 

It  has  been  expressly  held  that  corporations  are  not  dissolyed  by 

1  Boston  Glass  Manufactory  v.  Lang-  222 ;  Boston  Glass  Manufactory  v.  Lane- 

dop,  24  Pick.  49 ;  see  also  Olds  v.  Companj  don,  24  Pick.  (Mass.)  49 ;  Kincaid  v  Dwi- 

(Ma».),  70  N.  E.  1022.  nelle,  59  N.  Y.  548  ;  Jones  v,  Edson.  10 

«  BwBttt  r.  Company,  90  CJoim.  448 ;  Kan.  Ap.  1 10 ;  62  Pac.  249 ;  State  v.  Trus- 

Rorke    Thomas,  6«  K.  Y.  559;  P«ople  v.  tees,  5  Bid.  44 ;  Wilmington  &  Reading 

Ballard,  134  N.  Y.  269;  32  N.  E.  54;  Ry.  Co.  r.  Downwwd  (Del).  14  AtL  72o1 

Commonwealths.  Silfer,  53  Pa.  St.  71;  Muscatine  TumTWwiii  r.  Fnnck,  18  la 

Wilson  V.  Proprietors,  etc.,  9  R.  I.  590;  469;  U.  S.  v.  Company,  1  Fed.  700;  Brad' 

State  V.  Association,  35  0.  St.  258,  ley  v.  McKee,  5  Cnnch  C.  C.  298*  F«d. 

•  Commonwealth  v.  Slifer,  53  Pa.  St.  Cases,  No.  1784.  * 

71;  In  re  Lineal  Co,  190  Pa.  St.  124 ;  42  e  Sprague  Brimmer  Mfg.  Co.  v.  Com- 

Att.  538;  Wiboa  v.  Fwpsk^  ate.,  9  pany,  26  Fed.  572 ;  Stolze ».  Company,  100 

^               ^  Wis.  206  ;  75  N.  W.  967 ;  OMa  v.  dm 

«  People v.B.  4 &.T.BMid.l8W4HL  WmO^hnJLX  mSL 


CHAP,  v.]  LW18LATITE  OOOTOL  OVER  DOMESTIC  COEPORATIONS.  §  115 

Statutory  proceedings  in  bankmptey  or  insolvency,  or  by  appoint- 
Snt  of  rLivers  in  equity  or  by  asaignment  for  the  benefit  ol 

I'nT*  Forfeiture  of  Charters. -At  common  law  forfeiture  of 
cbartew  was  accomplished  by  means  of  scire  facias,  or  by  an 
n^^Ttiln  by  the  Jroper  State  officials  in  the  nature  of  a  writ 
of      warranto?   -  An  information  fl^^'^^^^ 
a  corporation  or  of  seizing  its  franchises,"  it  baa  been  said, «  ^ 
not  be  brought  except  by  the  authority  of  the  Comnionwed^, 
exercised  by  the  legislature  or  by  the  attorney  ^^^f^f^^^^ 
acting  nnder  its  direction  or  ex  officio  m  its  behalf.   For  the 
Commonwealth  may  waive  any  provision  of  any  condition,  express 
or  implied,  on  which  the  corporation  was  crated ;  and  courts 
not  dve  judgment  for  the  seizure  by  the  CommonwealUi  of  tiwi 
franchises  of  any  corporation  unless  the  Commonwealth  be  a  party 
in  interest  to  the  suit  and  assents  to  the  judgment. 

A  corporation  cannot  within  the  meaning  of  the  law  forfeit  its 
ricrhts  and  seal  up  the  corporation.  A  corporatioii  without  rights, 
without  legal  capacity  to  do  anything,  not  even  to  acquire  nfjts, 
is  an  impossibility.  It  has  never  been  seriously  contended  that 
mere  nonperformance  of  conditions  subsequent  on  the  part  of 
a  corporation  has  the  effect  ex  propria  vigore  to  put  an  end 
to  corporate  life.  By  such  non-performance  the  ^^''^''^ 
not  ipso  facto  dissolved  or  deprived  of  its  corporate  OTStenee 
or  corporate  rights,  but  it  is  simply  exposed  to  P«>ceedtngs  m 
behaU  of  the  State  to  establish  and  enforce  a  forfeiture.  The 
State  which  gave  the  corporate  life  may  take  it  away.  The  State 
which  imposed  the  conditions  may  waive  their  performance,  and 
the  corporate  life  may  run  on  until  the  State  by  proper  proceedingi 
(ordinarily  warranto,  or  in  the  nature  of  quo  wammto)  mtei- 
noses  and  enforces  a  forfeiture.* 

Courts  of  equity  have  no  inherent  jurisdiction,  in  the  absence 
of  statute  conferring  the  same,  to  decree  a  dissdntioii  of  a  cor- 
poration  or  declare  a  forfeiture  of  its  charter  on  any  grounds. 

1  Chamberlain    Company,  U8  Ma.s.       ^  366 ;  W.  &  B.  T.  Co.  Maryland, 

338;  Boston  Gla^^^^^^^  ^^^^.^^^  Hy. 

don  24  Pick.  (M«».)  49 ,  Ummi  ISW^  ^  ^ 

Bank    Company,  104  U.  S.  54.  5  feeler  v  Companv,  143  111.  197; 

.  Rex      ^r^;»J**"".^TH^   32  N  E  ^0;  Denike  i  Company,  80 
in;  m»  ».  Whom,  5  JoIiiukmis  Chan.  32  iN.  A^em*.o  tr-j 


§  115  mCOBPOBATIOir  AKD  OBOlHlZlTIOir  0^  COBPOBATIOXB.  [PABT  I. 

The  pnncipal  groands  under  tiie  siatate  upon  which  charters  will 
be  forfeited  may  be  enumerated  as  follows :  (1)  non-user  of  cor- 
porate franchises ;  (2)  mis-user  or  abuse  of  corporate  powers ;  (3) 
for  non-performance  of  conditions  precedent  to  valid  existeiiee  fts 
a  corporation ;  (4)  for  ncm-performanoe  oi  ecmditions  subsequent 
to  Talid  coBtinaa&oe  of  existraice  as  a  corporation ;  (5)  for  viola- 
tion of  express  statutes;  (6)  for  non-payment  of  taxes;  (7)  for 
insolvency.  These  will  now  be  taken  up  briefly  for  separate 
consideration. 

(1)  Forfeiture  for  non^iuer  of  corporate  franekUes.  It  is  a  weU* 
established  doctrine  of  the  law  that  courts  should  proceed  with 
extreme  caution  in  proceedings  which  have  for  their  object  the 
forfeiture  of  corporate  franchises;  nor  should  such  a  penalty  be 
visited  except  for  plain  abuse  of  power  by  which  the  corporation 
fails  to  fulfil  the  designs  and  purposes  of  its  organization.^  Again 
it  has  been  well  said :  ^  It  is  not  eyery  failure  to  perform  a  duty 
imposed  that  will  work  a  forfeiture.  It  must  be  something  more 
than  accidental  negligence,  something  more  than  an  excess  of 
power,  something  more  than  a  mere  mistake  in  the  mode  of 
executing  the  acknowledged  powers;  and  though  a  single  act 
of  simple  non-feasaaoe  may  be  a  ground  ol  forfeiture,  a  spedfio 
act  of  non-feasance  not  committed  wilfully  and  not  producing 
or  tending  to  produce  mischievous  consequences  to  any  one, 
and  not  being  contrary  to  formal  regulations  of  the  charter, 
will  not  be."  2 

All  these  judicial  utterances  are  little  more  than  a  declaration 
of  the  fact  that  the  policy  of  the  State,  ol  its  (^cers  and  courts 
should  be  to  encourage  in  all  legitimate  ways  the  organization 

and  operation  of  all  corporations  organized  to  promote  any  legit- 
imate enterprise.  "  The  rights,  privileges,  and  franchises  of  such 
corporations,"  it  has  been  well  said,  "should  not  be  declared 
forfeited,  and  they  ^ould  not  be  ousted  and  excluded  therefrom, 
excqyt  for  8<^d,  weighty,  and  cogent  reasons,  for  the  violation  of 
a  positive  or  prohibitory  statute  and  not  of  a  statute  whose  pro- 
visions are  permissive  and  apparently  directory,  and  never  upon 
mere  technical  grounds."  ^ 

The  term  "forfeiture  of  charter  for  non-user  of  corporate 
franchises,'*  as  here  used,  has  a  very  broad  signification.  It 

K.  Y.  599.  BBbhomwmUmmv,  Company,  l  Stete  ».  Chemical  Bank,  10  0.  St.  535. 

SSiM.  97;  Araitt  v.  CooifMiy,  IM  M.  >  State  v.  Cooipany,  8  R.  j.  181. 

m,  •]feQM«.8iil^71Iiid.478. 

158 


CHAR  V.l  LMSLAnVB  CONTROL  OVER  DOMESTIC  CORPORATIONS.  §  115 

may  have  wference  to  action  taken  by  the  State  with  a  view 
to  forfeiture  of  corporate  charters  on  any  one  of  the  foUowmg 
grounds:  failure  to  organize  the  corporation  within  the  time 
prescribed  by  statute  ;i  failure  to  carry  on  the  business  enn- 
Lrated  in  its  articles  ;2  failure  to  elect  officers  fittluie  to 
maintain  domicUiary  office  within  the  State;*  failure  to  com- 
mence  business  within  the  time  designated  by  statute. 

(2^  Forfeiture  for  nMuu  or  abme  of  corporate  powers.  lo 
work  a  forfeiture  on  the  ground  of  misuser  or  abuse  of  corporate 
powers,  there  should  not  only  be  a  wrong,  but  one  arwmg  from 
wiUul  abuse  or  improper  neglect.   The  corporate  default  must 
be  something  more  than  accidental  negligence  or  mere  mistaken 
excess  of  power,  or  mistake  in  the  mode  of  exercising  an  acknowl- 
edged  power.   There  must  be  an  abuse  of  trust,  of  such  a  nature  as 
would  render  a  trustee  liable  to  forfeit  his  station  on  flie  eomplamt 
of  his  ceetui       trust  if  the  question  stood  on  the  f^^^^^^^  ^^J^^ 
them.  Corporatiomi  are  political  trustees.  Have  they  fulfilled  the 
purposes  of  their  trust  or  acted  in  good  faith  with  a  view  to  fulfil- 
ment?  is  the  question  to  be  asked  when  they  are  caUed  upon^  to 
forfeit  their  charter,  either  for  acts  of  commission  or 

«It  appears  to  be  settled,"  observed  the  New  York  Court  cj 
Appeals,  "that  the  State  as  prosecutor  must  show  on  the  part 
of  Se  corporation  accused  some  act  against  the  law  of  its  being 
which  has  produced  or  tends  to  produce  injury  to  the  public.  The 
transgression  must  not  be  merely  formal  or  accidental,  but  mate- 
rial  and  serious,  and  such  as  to  harm  or  menace  the  public  welfare. 
For  the  Stete  does  not  concern  itself  with  the  quarrels  of  private 
litigants.    It  furnishes  for  them  sufficient  courts  and  remedies, 
but  interferes  only  where  some  public  interest  requires  its  action. 
Corporations  may  and  of  ten  do  exceed  their  authority  where  only 
private  rights  are  affected.    But  when  the  transgression  has  a 
wider  scope  and  threatens  the  welfare  of  the  people,  they  may 
summon  ttie  offender  to- answer  for  the  abuse  of  its  franchises  or 
the  violation  <^  its  corporate  duty."  ^ 

1  c.  .      Qimonfr^n  7fi  N  C  57  ^  W.  F.  C.  F.  Co.  ».Kittridge.  5  8«w.44; 

1  State  V.  Simonton,  vo  jn.  v^.  .      «    .   ,<^-ni  £io.  oo  v  i?  9»« 

.  W.  a  M. CO.  . Bum,  U4  K. C. 3.3;  ^^^^^^^^'^V^Z. 

19  O.  Hi.  ^i>o. 

»  Sfeftte  V,  Bftrron,  58  N.  H.  870.  822.  , xt  v  kqo  .  «a 

«  ^  I  Compil^T,  S8  IBbb.  3S0i  59       '  People    Company,  121  K  Y  582  M 

H.  W^48  i^n- Comply,  59  Kan.  K.  E.  834 ;  see  aUo  M.  0.  &  R.  K.  vO. 

151  ■  52  P«c. State  V.  Compui;.  45  Cross,  20  Ark.  443. 
Wi..57.. 


§  116  INCORPORATION  AND  ORGANIZATION  OP  CORPORATIONS.  [PART  I. 

(3)  Forfeiture  for  non-performance  of  conditiom  precedent 
Even  a  corporation  defectivelj  organized  maj  have  what  is 
termed  a  "  defaeto  existence,"  so  that  it  cannot  ordinarily  be 
impeached  by  parties  other  than  the  State.   Nevertheless  the 

right  to  bring  proceedings  to  forfeit  the  charter  of  such  cor- 
poration vests  with  the  State  which  may  bring  proceedings  to 
forfeit  the  same  and  oust  it  from  the  exercise  of  corporate 
powers.^ 

(4)  F^eitwre  fw  nmi-perfwrmance  of  condUion$  subsequent  It 
has  been  well  settled  that  charters  of  corporations  may  be  forfeited 
by  proper  action  brought  by  the  State  for  failure  to  comply  with 
conditions  subsequent  which  are  clearly  mandatory  and  not  mc^y 
directory  in  their  nature.^ 

(6)  Forfeiture  for  vMoHm  of  express  Mahtte.  This  is  one  of 
Hhe  clearest  grounds  for  the  exercise  by  the  State  of  its  right 
to  forfeit  charters.  The  most  common  ground  for  the  exercise 
thereof  is  in  connection  with  anti-trust  legislation.^ 

(6)  Forfeiture  for  nonrpaymont  of  taxes.  Several  of  the  States 
authorise  forfeiture  of  charters  for  non-payment  of  organization 
and  annual  fnmchise  taxes.  This  right  has  been  exercised  with 
great  frequency,  and  constitutes  unquestionably  a  valid  exercise 
of  the  power  of  such  legislature  over  corporations.* 

(7)  Forfeiture  for  insolvency.  In  the  absence  of  statutory  pro- 
vision to  that  efEect,  insolvent  alone  will  not  authorize  the  State 
to  forfeit  corporate  charters.*  However,  it  is  unquestionably  valid 
for  a  State  to  prescribe  that  if  a  corporation  be  insolvent  for  a 
certain  length  of  time  it  shall  constitute  a  forfeiture  of  its  charter.^ 

§  116.  The  Police  Power  of  the  State.  —  The  police  powerof  the 

State  comprehends  all  thoee  goieral  laws  of  internal  regulation 
which  are  necessary  to  secure  the  peace,  good  order,  health,  and 

1  Holmaa  9.  Sli^  105  Ind.  569;  People  ten,  4S  CaL  SOl ;  People  v.  Bank,  129  OL 

».  City  Bank,  7  CoL  226  ;  3  Pac.  214.  618 ;  22  N.  B.  288  ;  24  N.  E.  884. 

2  State  V.  Company,  1  Tenn.  Cases,  *  Hughesdale  Mfg.  Co.  r.  Vanner,  12 
511 ;  People  v.  Company,  131  N.  Y.  140;  R.  I.  491 ;  Bank  v,  Ckmftmj,  17  Apw  JAr. 
Hammond  v.  Strauss,  53  Md.  1.  (N.  Y.)  524. 

»  SimmoDBi;.  Company,  113  N.  C.  147;       ^  People  v.  Bank,  6  Cowen  (N.  Y.), 

State  ».  Company,  24  Texas,  80;  Bnjkat  211 ;  A.  &  L.  T.  Co.  v,  Holthoiise,  7  lud. 

V.  Company,  40  N.  J.  £q.  392 ;  People  v,  59;  State  o.  Bank,  13  Smeadaail.  (Miss.) 

Company,  60  How.  Pr.  82 ;  People  v.  Com-  569 ;  Chicago         Ins.  Coi.  v,  Needka, 

pany,  130  111.  268;  State  u.  Standard  Oil  113  U.  S.  574. 

Co.,  49  O.  St.  137;  People  v.  Company,       »  People  v.  Bank,  12  Mich.  526  ;  C.  M. 

121  N.  Y.  582 ;  see  also  People  v.  Cham-  L.  &  L  Ass'n  v.  Hunt,  127  III  257 ;  Denike 

V.  Company,  80  N.  Y.  699. 

160 


CHAP,  v.]  LEGISLATIVE  CONTROL  OVER  DOMESTIC  CORPORATIONS.  §  116 

comfort  of  society,  but  the  proper  limit  in  its  bearing  upon  charter 
rights  and  privileges  of  private  corporations  for  public  uses 
would  seem  to  he  this :  That  the  legislature  may  at  all  times  regu- 
late the  exercise  of  the  corporate  franchises  by  general  laws  passed 
in  good  faith  for  the  legitimate  ends  contemplated  hy  State  police 
power ;  that  is,  for  peace,  good  order,  health,  comfort,  and  welfare 
of  society ;  but  it  cannot  under  the  color  of  such  laws  destroy  or 
impiur  the  franchises  itself,  or  any  of  the  rights  or  powers  which 
are  essential  to  the  exercise  of  it.^ 

After  the  decision  of  the  United  States  Supreme  Court  in  Dart- 
mouth College  V.  Woodward,^  that  court  proceeded  to  enunciate 
the  doctrine  that  in  the  exercise  of  what  is  termed  "  police  power," 
the  several  States  might  pass  laws  as  a  valid  exercise  of  such 
powers  when  otherwise  thej  would  be  forbidden  to  do  so  under 
Section  10,  Article  1,  of  the  Constitution  of  the  United  States, 
which  forbids  the  impairing  of  the  obligations  of  contracts  by 
means  of  laws  enacted  by  them. 

The  police  power  arises  primarily  from  the  nature  of  the  social 
contract,  just  as  when  each  person  upon  becoming  a  member  of  a 
Bodetj  must  of  necessity  relinquish  some  of  the  rights  and  pnv* 
ileges  which,  as  an  individual  and  considered  alone,  he  might 
retain.  The  Supreme  Court  of  Massachusetts  in  Commonwealth 
V,  Alger  3  says :  "  All  property  is  subject  to  such  reasonable  re- 
strictions and  regulations  established  by  law  as  the  legislature 
under  the  governing  and  controlling  power  verted  in  them  by  the 
Constitution  may  think  necessary  and  expedient." 

In  Gibbons  v.  Ogden*  the  United  States  Supreme  Court  held 
that  the  police  power  is  lodged  with  the  several  States.  In  Prov- 
idence Bank  v.  Billings  ^  the  court  took  another  step  forward,  and 
held  that  the  abandonment  on  tlie  part  of  tiie  State  of  its  power  ol 
regulation  in  this  regard  ought  never  to  be  presumed  in  any  case 
where  the  purpose  of  the  State  to  abandon  it  does  not  clearly  appear. 

In  the  License  Cases  ^  the  court  held  that,  in  the  exercise  of  its 
police  power,  a  State  may  pass  quarantine  and  sanitary  laws  damag- 
ing and  even  destroying  property  in  smne  cases.  In  Bartenieyer 
V.  Iowa  ^  tiie  court  held  that  a  State  law  prdbdhiting  the  manufac- 

1  p.  W.  B.  B.  B.  Co.  V.  Boweto,  4  Hoofl- 
ton,  Del.  506. 

*  4  Wheat.  5ia 

•  7  Cttilu  84. 

II 


*  9  Wheat.  1. 

*  4  Peters,  514. 

*  5  Howard,  404. 
Y  18  WaL  138. 

,161 


§  116  INCOBPOBAHON  AND  0B6ANIZATI0N  OF  COBPOBATIONS.  [PABT  I. 

ture  and  sale  of  intoxicating  liquors  was  a  valid  exercise  of  the 
police  power.  In  Beer  Company  v,  Massachusetts  ^  the  court  held 
that  as  a  measure  of  poliee  r^latioa,  looking  to  the  preaenratioii 
of  pnhllc  morals,  a  Stote  law  prohibiting  the  manufacture  and  sale 
of  intoxicating  liquors  is  not  repugnant  to  any  clause  of  the  Con- 
stitution of  the  United  States. 

In  Mugler  v.  Kansas  ^  it  was  held  that  a  State  may  absolutely 
prohibit  tlie  manofaetaro  and  sale  of  intoxicating  liquors  as  a 
beverage,  and  may  declare  places  where  snch  liquors  are  mannfac- 
tured  or  sold  to  be  nuisances,  and  may  authorize  the  destruction  of 
such  liquors  found  therein,  and  of  all  property  used  in  keeping  and 
manufacturing  such  nuisances.  Such  a  statute  is  valid  as  tq  such 
liquors  lawfully  manufactured  before  the  enactment  of  the  statute, 
and  although  it  greatly  deteriiKrates  the  valne  of  the  property  law- 
fully used  in  such  manufacture  before  the  enactment  of  the  statute. 

In  Munn  v.  Illinois  ^  it  was  held  that  when  the  owner  of  property 
devotes  it  to  a  use  in  which  the  public  has  an  interest,  he  in  effect 
grants  to  the  pablic  an  interest  in  snch  use,  and  must  to  the 
extent  of  that  interest  sobmit  to  be  controlled  by  the  public  for 
tiie  common  good  as  long  as  lie  maintains  the  use. 

In  Fertilizing  Company  v.  Hyde  Park*  the  right  of  State 
authorities  to  compel  the  removal  of  a  bone  fertilizing  business 
from  a  location  near  the  village  to  a  point  farther  removed,  was 
held  to  be  valid  as  an  ezerdse  of  ihe  police  power. 

In  the  Slaughter  Hoose  Gases*  the  court  held  that  the  power 
of  State  legislatures  to  make  a  contract  of  such  a  character  that 
under  the  provisions  of  the  Constitution  it  cannot  be  modified  or 
abrogated  does  not  extend  to  subjects  affecting  public  health  and 
pnblie  morals,  so  as  to  limit  the  farther  exercise  of  legislative 
power  over  those  subjects,  to  ^  prejadice  ci  ihe  general  welfare. 

To  summarize  briefly  the  general  doctrine  of  the  federal 
Supreme  Court  on  this  subject,  the  same  may  be  done  by  present- 
ing the  following  abstract  propositions : 

(1)  Laws  for  the  welfare  and  safety  of  a  commnnity  being 
essential  to  iJie  existmiee  ci  every  Slate,  it  cannot  be  snpposed  to 
have  been  within  the  intention  of  the  original  thirteen  States  to 
limit  this  power  by  assenting  to  the  Federal  Constitution.^ 

1  97  U.  S.  25.  *  111  U.  S.  746. 

8  123  U.  S.  623.  «  Louisville  &  N.  R.  Co.  v,  Eentnckj* 

«  94  U.  S.  1 13.  161  U.  S.  677  i  40  L.  £.  849. 

*  97  U.  S.  659.  . 
162 


CHA?.  v.]  LBGISLATITB  OONTBOL  OVm  DOMESflO  OORPOBATfONS.  §  116 


(2)  Generally  speaking,  the  extent  to  which  a  State  can 
regulate  the  business  or  affairs  of  a  corporation  depends  upon 
the  nature  of  the  business  —  whether  it  affects  the  public  closely 
or  remotely.  If  it  is  of  such  a  character  or  magnitude  that  the 
public  are  directly  interested  in  its  proper  management,  th^  it 
falls  within  the  proper  sphere  of  legislative  control.* 

(3)  Being  an  inherent  right  as  well  as  a  duty,  the  legislature 
may  pass  enactments  looking  towards  the  safety  of  life  and  prop- 
erty, and  general  laws  of  this  nature  are  a  legitimate  exercise  of 
the  police  power."  Thus  it  may  compel  railroads  to  fence  traeks, 
maintain  cattle  guai*ds,  put  up  signboards  at  crossings,  construct 
viaducts,  require  all  trains  to  stop  at  intersections  of  railroads,  etc.^ 

(4)  Laws  intended  to  prevent  or  remove  nuisances  are  clearly 
within  the  "  police  power  "  of  the  State.^ 

(5)  A  State  may  pass  laws  for  the  protection  of  its  inhabitants 
against  the  evils  of  intemperance,  even  though  existing  contracts 
be  affected  thereby.* 

(6)  Laws  regulating  the  employment  of  persons  of  a  certain 
age  in  manufactories  are  a  valid  exercise  of  the  general  power  of 
the  State  to  enact  laws  to  secnro  the  heallk  and  education  of 
the  commnnity.* 

(7)  A  State  may  by  statute  protect  the  interest  of  employees 
when  the  common  law  affords  no  protection ;  as  for  example, 
a  law  providing  that  all  railroad  companies  shall  be  liable  for 
wages  due  to  day  laborers  employed  by  contractors  engaged 
to  construct  the  company's  railroad  and  works  w^s  held  to  be 
valid.* 

(8)  A  State  may  by  general  laws  regulate  the  use  and  dis- 
position of  property  within  its  jurisdiction,  although  existing 
incorporated  companies  be  thereby  affected.^ 

(9)  A  State  may  psss  laws  for  the  proteetioQ  of  the  morals 

^  Mann  r.  Illinois,  94  U.  S.  113  ;  24  28  L.  E.  629 ;  Magler  v.  Kansas,  123  U.  S. 

L.  £.  77;  Pearsall  v.  Company,  161  U.  S.  623. 

646;40L.  E.888.  *  Knoxville  Iron  Ga  v.  Harbifoii,  188 

*  Reid  V.  Colorado,  187  U.  8.  137;  47  U.  S.  13;  46  L.  E.  55. 

L.  E.  108 ;  Smith  v.  Coil^tliy,  181  U.  S.       ^  Enoxville  Iron  Co.  v.  Harbison,  188 

248 ;  45  L.  E.  847.  U.  S.  13  ;  46  L.  E.  55  ;  Butchers'  Union, 

8  Slaughter  House  Cases,  16  WaS.  86;  etc.  v.  Company,  111  U.  S.  746 ;  28  L.  E. 

21  L.  E.  394.  585 ;  Dent  v.  West  Virginia,  129  U.  S.  1 14 ; 

*  Reymaon  Bnwing  Co.  9.  Brieter,  88  L.  E.  683;  Holden  r.  Haidy,  169  U.  8. 
179  U.  8.  445 ;  45  L.  .£.  269 ;  Rhodes  v.  866  ;  48  L.  £.  780. 

State  of  Iowa,  170  U.  S.  412;  42  L.  E.       7  Budd  v.  New  T«i,  148  U.S.SI7| 

1088;  Foitsr  «.  Kauaa»  118  U.  &  801;  86  L.  1^847. 


§  118  INCORPORATION  AND  ORGANIZATION  OF  CORPORATIONS.  [PABT  L 


of  its  citizens,  even  though  vested  corporate  rights  be  thereby 
affected.^ 

§  117.  finlilittTn   IhTestlgation  ixi^to  Corporate  Affairs.  —  The 

itatoteB  of  Ckdifornia,  Michigan,  Minoeaola,  North  Dakota,  Okla- 
homa, South  Dakota,  and  Wisconsin  contain  express  provisions 
for  the  appointment  of  legislative  committees  to  examine  into 
the  affairs  of  corporations  organized  under  their  laws.  The  pro- 
visiona  of  the  South  Dakota  act  may  be  quoted  as  exemplifying 
the  nature  of  aodi  sli^iEtoj  ^roviaioii.   It  reads  as  follows: 

^Tlm  legislative  assemblj,  or  dtim  hfaaeh  ihmof,  may  examine 
into  the  affairs  and  oondition  of  any  corporation  in  this  Stale  at  all 

times ;  and  for  that  purpose  any  committee  appointed  by  the  said 
assembly,  or  either  branch  thereof,  may  administer  all  necessary 
oaths  to  the  directors,  officers,  and  stockholders  of  such  corporation, 
and  may  examine  them  on  oath  in  relation  to  the  affairs  and  con- 
ditions thereof ;  and  may  examine  the  safes,  books,  papers,  and  docu- 
ments belonging  to  such  corporation,  or  pertaining  to  its  affairs  and 
condition,  and  compel  tibe  piodaetion  of  all  keys,  books,  papers,  and 
doeoments  bj  aomniary  process,  to  be  issued  on  application  to  any 
cireait  court  or  any  judge  tiiem^  soeh  roles  and  i^piktkms  as 
the  court  may  prescribe."  • 

Such  an  inquiry  as  is  authorized  by  the  statutes  jnst  referred  to 
has  been  held  not  to  constitute  a  judicial  act,  and  is  therefore  con- 
sidered a  valid  exercise  of  legislative  powers.^  On  this  particular 
anbjeet  the  Sopmae  Court  of  JMaaMehoBetta  spc^e  as  follows: 

"^Oie  inqmry  into  Hie  affiurs  or  defaults  of  a  corporation  with  a 
View  to  ecmthrae  or  disoontinne  it,  is  not  a  judicial  act  No  issue  is 
framed.  No  decree  or  judgment  is  passed.  Ko  forfeiture  is  adjudged. 

No  fine  or  imprisonment  is  imposed.  But  an  inquiry  is  had  in  such 
form  as  is  deemed  most  wise  and  expedient,  with  a  view  to  ascertain- 
ing facts  upon  which  to  exert  legislative  power  or  to  learn  whether 
a  contingency  has  happened  upon  which  legislative  action  is  required."^ 

§  118.  Iiesislative  Requirement  of  Annual  Reports  from  Corpora- 

tlmiff_  Statutes  eauat  in  thirty-4;hree  of  the  Ckoummwealtha 

1  Austin  V.  Tennessee,  179  U.  S.  343;       ^  gee.  478,  Rer.  Civ.  Code;  sec.  2970, 

45  L.  £.  224 ;  Petit  v.  Minnesota,  177  U.  S.  Comp.  L, 

164;  4L.S.716;  nuiBiiiKtOBv.GeoigiA,      •  Lodivop  v.  8lediBaB,4S  Cobb.  5S8; 

161  V.  8. Sit;  41  L.  B.  166;  L'Hote  t;.  Ped.  Cas.  No.  8519. 
lie«Oikuii,77  n.&5e7;^I<.S.m      ^  Qmm*^  Bskwir,  S8  Pid;.  a44> 


CHAP,  v.]  LEGISLATIVE  CONTROL  OVER  DOMESTIC  CORPORATIONS.  §  119 

requiring  annual  reports  from  domestic  corporations.^  The  valid- 
ity of  Buch  statutes  was  considered  by  the  Supreme  Court  in  the 
case  of  Ei^le  .Insurance  Company  v.  State  of  Ohio  ^  The  court 
in  its  opinion  therein  spoke  as  follows : 

The  right  of  the  plaintiff  in  error  to  exist  as  a  corporation  and  its 
authority  in  that  capacity  to  conduct  the  particular  business  for  whieh 
it  was  created  were  granted  subject  to  the  condition  that  the  privileges 
and  franchises  conferred  upon  it  should  not  be  abused  or  so  employed 
as  to  defeat  the  ends  for  which  it  was  established,  and  that  when  so 
abused  or  misemployed  they  might  be  withdrawn  or  reclaimed  by  the 
State  in  such  way  and  by  such  modes  of  procedure  as  were  con- 
sistent with  law.   Although  no  such  condition  is  expressed  in  the 
plaintiff's  charter,  it  is  implied  in  every  grant  of  corporate  existence. 
Equally  implied  in  our  judgment  is  the  condition  that  the  corporation 
shall  be  subject  to  such  reasonable  regulations  in  respect  to  the  general 
conduct  of  its  powers  as  the  legislature  may  from  time  to  time  pre- 
scribe which  do  not  materially  interfere  with  or  obstruct  the  sub- 
stantial enjoyment  of  the  privileges  the  State  has  granted  only  to 
secure  the  ends  for  which  the  corporation  was  created.    If  this  con- 
dition be  not  implied^  then  the  creation  of  corporations  with  rights 
and  privileges  which  do  not  belong  to  individual  citizens  may  become 
dangerous  to  the  public  welfare  through  the  ignoranoe  or  miseonduet  or 
fraud  of  those  to  whose  management  their  affairs  are  entrusted.  It 
would  be  extraordinary  for  the  legislative  department  of  a  govern- 
ment, charged  with  the  duty  of  enacting  such  laws  as  may  promote 
the  health  or  morals  or  prosperity  of  the  people  might  not  when 
unrestrained  by  constitutional  limitations  upon  its  authority,  provide 
by  reasonable  reguilatiicMis  against  the  misuse  of  special  corporate 
privileges  which  it  has  granted,  and  which  could  not  except  by  its 
sanction,  express  or  implied,  have  been  exercised  at  all'* 

The  conclusion  of  the  court  in  the  case  just  referred  to  was  that 
the  charter  of  the  corporation  did  not  exempt  it  from  obligatiiNEia 

to  comply  with  the  subsequently  established  police  rcgrulations  of 
the  State,  requiring  certain  corporations  to  make  annual  state- 
ments of  their  conditi(|D. 

§  119.  iDspeotioB  of  Corporate  Books. — In  all  the  Gommim- 
wealths  but  five  statutes  have  been  enacted  requiring  the  keefM&g 
of  certain  corporate  books  and  giving  to  stockholders,  and  some- 
times to  creditors  as  well,  the  right  to  mspect  the  same.  At 

1  See  Part  IIL  Table  7,  page  577,  «  IM  U.  &  44S. 


§  119  nrooBPoiuiiON  and  obganization  of  coapoAATions.  [PAftr  t. 

coinmon  law  stockholders  had  the  right  to  inspect  books  and 
papers  of  the  corporation  at  reasonable  times  and  for  a  proper 
porpose.^  Creditors  had  no  meh  eommon  law  rights. 

On  this  subject  the  New  York  Court  of  Appeals  in  the  Matter 
of  Stein  way  ^  spoke  as  follows : 

"  The  elementary  works  unite  in  holding  that  the  incorporator  has 
the  right  in  question  and  that  mandamus  is  the  proper  remedy.  We 
think  that  according  to  the  decided  weight  of  authority  a  stockholder 
has  the  right  at  eommon  law  to  inspect  the  books  of  his  corporation 
at  a  propm  ttme  and  j^aee  and  iox  a  proper  purpose,  and  that  if  this 
nf^t  is  refosed  fagr  the  officers  in  eharge,  writ  of  mandamus  may  issue 
in  the  somd  discretion  of  the  court  with  suitable  safeguards  to 
protect  the  interests  of  all  concerned.   It  should  not  be  issued  to  aid 
a  blackmailer,  nor  withheld  simply  because  the  interest  of  the  stock- 
holder is  small,  but  the  court  should  proceed  cautiously  and  dis- 
creetly, according  to  the  facts  of  the  particular  case.    To  the  extent, 
however,  that  an  absolute  right  is  conferred  by  statute,  nothing  is 
left  to  the  discretion  of  the  court  but  ihe  writ  to  issoe  as  a  matter 
of  eonrse,  althoi^^h  even  then  doubtless  doe  precautions  may  be  taken 
as  to  lame  and  place  so  as  to  prevent  interruption  of  bosiness,  or 
other  sarioa&  ineonvenienoe.   We  do  not  think,  however,  that  the 
statnte  now  in  force  in  this  State  is  exclusive,  or  that  it  has  abridged 
the  common  law  right  of  stockholders  with  reference  to  the  examina- 
tion of  the  corporate  books.    By  enabling  the  stockholder  to  get  some 
information  in  a  new  way,  it  did  not  impliedly  repeal  the  common 
law  rule,  which  enabled  him  to  get  other  information  in  another  way, 
for  the  courts  do  not  hold  the  common  law  to  be  xepealed  by  impli- 
cation unless  the  intention  is  obvious.  By  simply  providing  an  addi- 
Monal  remedy  the  existing  remedy  was  not  taken  away.   The  statute 
merely  stoengthens  the  eommon  law  rule  witii  reference  to  one  part 
thereof,  and  left  the  remainder  intact." 

The  right  of  inspection  of  corporate  books  is  not  the  inspection 
of  the  idle,  the  impertinent,  or  the  curious,  but  an  inspection  with 
a  laudable  object  to  accomplish,  or  a  real  and  actual  interest  upon 
which  is  predicated  the  request  lor  information  disclosed  fay  the 
books.' 

1  People  V.  Eadie,  63  Hud,  320;  133       «  159  N.  Y.  250. 
N.  Y.  573 ;  Burham  v.  Company,  76  Cal.       8  state  ex  rel.  Bourdette  v.  CoBntBV, 
24;  17  Pac.  940;  Phceuix  Iron  Co.  v.  Com-   49  La.  Ann  23  So.  815. 

moowttdtli,  lis  Fi.  St.  563 ;  Hemingwa/ 
«.  fl— iiigBij,  iS  0—.  449. 

160 


CHAP,  t.]  IMtSLAVTE  GOKTBOL  OTIB  DOttSSTIC  OOBPOEATIONS.  §  120 


The  purpose  of  requiring  a  copy  of  stock  hooks  and  books  of 
account  at  the  corporation's  domiciliary  office  is  to  protect  the 
rights  of  stockholders  and  to  aid  the  State  in  exercising  its  visito- 
rial  powers,  or  to  enable  creditors  or  stockholders  to  ascertain  the 
number  of  shares  standing  in  the  names  of  each  so  as  to  levy 
exeontion  and  attachment  thereon.  The  mere  fact  that  a  domestic 
corporation  has  kept  its  books  in  another  State  when  required  by 
law  to  keep  its  books  at  its  domiciliary  office,  is  not  a  ground  for 
dissolving  the  corporation  when  parties  entitled  to  inspection  of 
such  books  have  never  been  refused  the  right  to  inspect  the  same 
at  the  domiciliary  office.^ 

§120.  Anti-Tnart  liegtataiiM. — The  term  ^tmst"  indudea 
any  form  of  combination  or  combinations  between  corporations  or 
between  corporations  and  individuals  for  the  purpose  of  regulating 
production  and  repressing  competition  by  means  of  the  power 
tiins  centralized.^ 

Under  tlie  common  law  agreements,  pools,  traats,  or  eombma- 
tions  between  persons  or  corporations  looking  towards  any  absolute 
restraint  of  trade  or  to  regulate  prices  or  to  promote  monopolies, 
were  against  public  policy,  and  as  such  were  unlawful  and  void. 
But  when  the  question  of  public  policy  is  at  issue,  certain  matters 
should  be  noted. 

It  has  been  well  said  ^  that  the  public  policy  of  tlie  State  Tariea 
from  time  to  time.  It  is  not  to  be  measured  by  the  private  com- 
bination or  combinations  of  the  persons  who  happen  to  be  exer- 
cising judicial  functions,  but  by  reference  to  the  enactment  of  the 
law-making  power,  and  in  the  absence  of  them  to  the  decisions  of . 
the  courts.  When,  however,  the  l^latnre  has  spoken  upon  a 
particular  subject  and  within  the  limits  of  its  constitutional 
powers,  its  utterance  is  the  public  policy  of  the  State."  • 

Congress  dealt  with  illegal  trade  combinations  in  relation  to 
inters^ite  commerce  as  early  as  1887,  when  it  passed  the  Inter- 
State  Commerce  Act,  and  later  on,  July  2, 1890,  it  passed  what  ia 
known  as  the  "  Sherman  Anti-Trust  Act."  Smce  that  tune  thirty- 
three  of  the  States  have  passed  more  or  less  stringent  anti-trust 
acts.*  All  this  legislation  has  been  framed  with  the  same  purpose. 

1  Ribling  Stock  Cow ».  FtepK  147  Dl.       «  MacGinniis  v.  Company  (Mont.),  75 

234  ;  35  N.  E.  608.  Pac.  89  ;  United  States  v.  Association,  166 

2*  MacGimiiss  ».  Company  (Mont.),  75  U.  S.  290 ;  41  L.  E.  1007. 
Pac  89.  *  See  Ptetm.  Table  3,  page  578. 

167 


§  121  INCOBPOfiAXION  AKO  0B6ANIZ4XI0N  OF  COftPOEiLXIOMS.  iPABT  U 


In  some  of  these  acts  an  arbitrarj  distinction  is  made  between 
dealers  and  prodneers.  Such  provisions  ,  have  nnder  certun  oli^ 
comstances  been  declared  to  be  ^  class  legislation,"  and  as  soch 

are  invalid  under  the  Fourteenth  Amendment  to  the  Federal 

Constitution. 

Under  tliis  principle  the  anti-trust  acts  of  Illinois  ^nd  Texas 
haye  recently  been  declared  to  be  unconstitutional.^ 

In  the  note  below  will  be  found  the  dates  of  the  passage  of  the 
earlier  anti-trust  acts  in  the  several  States.' 

§  121.  Regulation  of  Internal  Affairs. — In  many  of  the  States 
the  regulation  of  the  internal  affairs  of  corporations  has  been 
largely  delegated  by  statute  to  the  corporations  themselves.  Such 
is  the  case  in  Alabama,  Cionneoticnt,  Delaware,  Iowa,  Maryland, 
Massachusetts,  New  Jersey,  Nebraska,  New  York,  North  Carolina, 
South  Carolina,  Tennessee,  Utah,  Virginia,  West  Virginia,  and 
Wisconsin. 

In  other  of  the  Commonwealths,  without  express  provision  of 
law  permitting  the  same.  State  officials  allow  clauses  for  the 
p^^tion  d  the  internal  aflkirs  of  the  corporation  to  be  in- 
corporated in  articles  of  incorporation  filed  with  them.   As  an 

1  ConnoUj  v.  Unioii  S.  P.  Co.,  184  tions;  Eentacky,  General,  May  20, 1890; 

U.  S.  ft40;  46L.'£.679;  Stirte  v.  Syppen  LoiriiiMia,  Gonenl  went  into  effect  Jolj  7» 

&  Compress  Warehouse  Co.,  95  Texas,  603 ;  1 892 ;  Maine,  General,  Mar.  7, 1889 ;  Mieh- 

69  S.  W.  58;  Ford  v.  Association,  155  111.  igan,  became  a  law  July  1,  1889;  Minne- 

166;  39  N.  E.  651 ;  Harding  v.  Company,  sota,  April  20,  1891  ;  Mississippi,  Part  of 

182  111.  551 ;  55  N.  £.  577.    See  also  the  Code  ef  the  General  St.  Laws  of  Mis- 

Norihem  Secaritiee  Co.  v.  United  States*  siasippi  adopted  in  1892,  and  amended 

its  U.  &  197.  Maieli  11, 1896;  MiMOOfi,  Original  Aet, 

>  The  Federal  AntHlVwt  Act  coBHMialy  April  9,  1891,  xerised  under  ^et  o€ 

known  as  "the  Sherman  Act"  was  ap-  April  11,1895,  and  rerised  again  March  24, 

proved  July  2,  1890.   The  following  is  a  1897;  Montana,  Annotated  Code  of  189.5, 

list  of  the  States  wherein  anti-trust  legis-  sees.  321-325  ;  Nebraska,  Act  of  April  8, 

lation  of  a  more*  or  less  comprehensive  1897;  New  Mexico,  Feb.  4,  1891;  New 

chainfftfiT  WW  pMwd,  togetlmr  wkh  «he  To*,  May   7,  1897 ;  North  Carolina, 

date  tbe  mmt  west  into  dieet:  Mnxch  11, 1889 ;  North  Dakota,  March  9, 

Alabama,  Insurance  Act,  Feb.  18, 1897;  1897  ;  Oklahoma,  Dec.  25,  1890;  Soath 

Arkansas,  Anti-Trust  Act,  Mar.  16,  1897;  Carolina,  Feb.  25,  1897;  South  Dakota, 

California,  Cattle  Trust  Act,  Feb.  27,1893 ;  March,  1,  1897  ;  Tennessee,  April  6,  1889 

Delaware,  Life  Insurance  Act,  Feb.  15,  amended  March  30,  1891 ;  Texas,  Origi- 

1891 ;  Florida,  Trade  in  Cattle,  Jane  11,  nal  Act,  March  30, 1889,  amended  April  30, 

1897; Georgia, Anta.M4»opoljAet,DecS8,  1895 ;  Utah,  March  9, 1896 ;  Washington, 

1896 ;  Illinois,  Prohibitory  Pools,  Tnuts,  Con.,  Art.  XII.  see.  32,  and  abo  Act  erf 

and  Combinations,  Original  Act,  July  11,  March  21,  189.5,  Seeeion  Laws,  1895, 

1891,  amended  June  10,  1897;  Indiana,  chap,  cxlviii. ;  Wisconsin,  April  27,  1897. 

Mar.  5,  1897,  General  Anti-Trust;  Iowa,  ( See  " Biography  of  Commercial  Trusts," 

General  Anti-Trust,  May  6, 1890;  Kansas,  by  Wm.  H.  Winters,  Librarian  of  the 

Matt.  %  1897,  deSnaa  a  teMt  in  Sfe  lee-'  N.  Y.  Law  Inatitvte  in  1890.) 

168 


CHAP.  Y.^  LE6ISLATIYJS  CONIBOL  OYEB,  DOMESTIC  COBPOBATIONS.  §  122 

example  of  the  statutes  above  referred  to,  attention  is  called  to  tke 
proTisiooa  of  the  New  Jereej  Act,  which  reads  as  follows : 

^  The  certificate  of  incorporation  may  also  contain  any  provision  . 
which  the  incorporators  may  choose  to  insert  for  the  regulation  of  the 

business  and  for  the  conduct  of  the  affairs  of  the  corporation,  and  any 
provision  creating,  defining,  limiting,  and  regulating  the  powers  of  the 
corporation,  the  directors^  and  the  stockholders  or  any  class  or  classes 
of  stockholders."^ 

I 

I 

Without  such  statutory  auiliority  State  officials  are  unquestioii- 

ably  justified  in  refusing  to  allow  articles  of  incorporatioii  to  be 

filed  containing  such  clauses  as  are  here  referred  to.*  ^ 

The  Court  of  Appeals  of  New  York  in  an  early  case,  commenting 
upon  the  legal  effect  of  the  insertion  of  provisions  in  the  articles 
not  authorised  by  the  incorporation  act,  spoke  as  follows : 

'*The  want  of  anthority  for  this  provision  wonld  not  affect  the 
validity  of  the  corporation.   The  articles  must  contain  the  statements 

affirmatively  required  by  the  act,  because  those  statements  constitute 
the  conditions  precedent  to  the  right  of  the  company  to  become 
incorporated.  If  unauthorized  provisions  are  added,  all  the  acts  done 
pursuant  to  such  provisions  will  be  void,  but  until  the  company  is 
proceeded  against  for  abuse  of  its  franchises  its  rights  as  a  corporatioii 
will  not  be  affected  by  soch  unauthorized  provisions.^'  * 

The  more  modem  view  in  regard  to  such  matters  is  that  where 

State  officials  are  either  expressly  or  impliedly  empowered  to  pass 
upon  the  validity  of  articles  of  incorporation  submitted  to  them 
with  a  view  to  filing  in  their  office,  the  approval  of  such  State 
official  once  obtained  renders  such  clauses  as  are  here  referred  to 
valid  as  against  all  but  the  State,  even  when  their  insertion  in  the 
articles  is  not  expressly  authorized.* 

§  122.  Liability  of  Stockholders  for  Debts  of  the  Corporation.  — 

Tlie  general  subject  of  stockholders'  liability  may  be  best  dis- 
cussed under  three  heads :  (a)  Liability  for  unpaid  stock  subscrip- 
tions; (h)  Double  liability  as  established  by  statute  in  certain 

1  New  Jersey  Session  Laws  of  1896,       '  Eastern  Piank  Road  Co.  v.  Yaaghau, 
chap.  185,  sec.  8,  subdivision  7.  14  N.  Y.  551. 

>  /n  re  Steyedofes'  Bwiefidal  Am'o,      *  See  amU,  see.  6. 
U  Fhfla.  Fa.  ISO;  Me  anU,  me.  & 

-  « 


§  122  nfCOBPOBATIOK  IKD  aBOAMKAlIOR  OP  OOSMUimm.  [TAXtt 

States ;  (c;)  Special  liability  as  established  hj  statate  in  certain 

States. 

(a)  Liability  for  unpaid  stock  subscription.  The  statutes  which 
exist  in  nearly  every  Commonwealth  in  the  Union  making  stock- 
holders liabk  for  unpaid  stock  rabscriplions  are  merely  declaratory 
of  the  common  law.^  The  liabtlity  of  stockholders  of  corporations 
for  unpaid  stock  subscriptions  with  reference  to  creditors  is  often- 
times confused  with  their  liability  to  the  corporation  itself.  The 
latter  liability  is  directory  and  the  right  to  enforce  it  may  be 
waived  by  tlie  corponiti<Ni.  In  the  absence  of  soch  waiver  the 
sttbscribing  stockholders  are  bomid  by  the  contract  of  subscription 
to  pay  the  full  value  of  their  shares  in  such  instalments  and  in 
such  manner  as  may  be  prescribed  by  the  laws  of  the  State  or  by- 
laws of  the  corporation.  In  such  cases  the  liability  may  be  enforced 
by  the  ordinary  remedies.  The  corporation  nsnally  has  a  li^ 
upon  the  stock,  «id  may  sdl  the  same  in  satis&daon  of  the  debt, 
and  may  collect  the  deficiency,  if  any,  by  action  against  the  delin- 
quent stockholders. 

On  the  other  hand,  as  the  corporation  is  a  legal  entity  distinct 
from  the  stookholdeis  who  ocmstitute  it^  no  debts  or  obligations 
incurred  by  it  can,  in  the  absence  of  a  direct  statutory  provision, 
impose  any  lawful  liability  upon  the  stockholders.  But  in  equity, 
under  what  is  termed  the  "  trust  fund  doctrine,"  the  debts  of  the 
stockholders  to  the  corporation  are  regarded  as  equitable  assets  of 
the  corporation  uid  may  be  reached  by  the  creditors  if  the  legal 
assets  prove  immffidait.  This  trost  fund  doctrine  dmves  its  main 
support  at  the  present  time  from  the  Supreme  Court  of  the  United 
States,  but  it  has  secured  recognition  in  many  jurisdictions. 

As  stated  in  Sanger  v.  Upton,^  "  The  capital  stock  of  an  incor- 
porated company  is  a  fund  set  apart  for  payment  of  its  debts.  It 
is  pnhlicly  idedged  to  those  who  deal  with  the  corporation  for  tiieir 
security.  Unpaid  stock  is  as  much  a  part  of  this  pledge,  and  as 
much  a  part  of  the  assets  of  the  company  as  the  cash  which  has 
been  paid  in. 

The  stockholders  tiins  become  individually  liable  for  the.debts 
oi  the  corpcnratioii,  to  tiM  detent  of  the  unpaid  balance  on  theur 
stock.   They  are  ako  in  some  States  subject  to  other  statutory 

liabilities  hereinafter  set  forth.  The  statutory  remedy  is  usually 
by  equitable  action,  but  in  some  States  by  an  action  at  law. 

&  l^ylor  r.  CoMOCii^  117  JM.  MS.  <tlU.8.«l. 

170 


CIBAf.T.J  IMmMPTE  OOMTBOL  OVEB  D0M£SIIG  COBPOBATIONS.  §  122 

Under  nearly  all  such  statutmy  provisions,  the  liability  of  stock- 
holders is  intended  merely  as  a  secondary  security  for  creditors 
in  case  the  assets  of  the  corporation  are  insufficient  to  meet  its 
debts,  but  in  special  cases  stockholders  may  be  made  parties 
defendant  in  an  original  action,  and  if  they  are  obliged  to  pay  any 
ddlit  of  the  corporation  they  may  bring  an  action  against  the  cor<. 
poration  for  the  amount  so  paid,  and  are  usually  entitled  aka 
to  exact  contribution  from  the  other  stockholders." 

The  only  other  questions  which  are  of  practical  importance  in 
connection  with  the  present  subject  may  be  restricted  to  two  classes : 
one  relates  to  tlie  liability  for  unpaid  stock  subscriptions  to  cred- 
itors as  between  the  tomderor  imd  the  transferee,  and  the  other  re- 
lates to  the  liability  to  creditors  of  pledgees  and  trustees  d  stock. 

With  reference  to  the  first  question  it  may  be  said  that  the 
question  depends  upon  the  law  of  the  State  in  which  the  stock- 
holder may  reside  and  in  which  action  may  be  brought.^  In  most 
States  transferors  of  stock  are  not  subject  to  stockholders'  liability, 
and  are  thereafter  released  from  liability  for  assessments  made  bf 
the  corporation. 2 

In  the  absence  of  statutory  provision  to  the  contrary,  a  bona  fide 
transfer  of  stock  perfected  on  the  books  of  the  corporation,  dis- 
charges the  transferor  from  any  further  liability  either  to  the 
corporation  or  to  creditors  for  calls  made  after  the  transfer  and  for 
calls  made  prior  thereto,  and  the  transferee  takes  his  place  and 
becomes  liable  for  calls  made  after  the  transfer  but  not  for  calls 
made  before.^  The  distinction  which  clearly  obtains  between  one 
who  holds  his  stock  by  transfer  and  one  who  is  an  original  sub- 
scriber to  the  stock  of  the  corporation,  must  be  ciuefully  noted. 
The  former  may  in  good  faith  discharge  himself  from  liability  for 
unpaid  instalments  by  due  transfer  of  his  shares,  while  the  latter 
cannot  obtam  immunity  in  this  way.  The  subscriptions  for  stock 
and  the  acceptance  of  a  certificate  for  the  shares  constitute  a  con- 
tract between  the  subscriber  and  the  corporation  by  which  h# 
engages  to  pay  the  remaining  instalments  on  demand  from  the 
corporation.  From  this  agreement  the  subscriber  cannot  recede 
without  the  consent  of  the  corporation.^  In  some  of  the  States 

t  Gtora  V.  Hnat,  ISS  Mo.  8SS;  SS  also  BigoM  Tion  Co.».Bfinro,  171  H.T. 
aw.  181.  488;64N.  E.  194. 

2  M  L.  T.  Co.  V.  Ward,  13  Ohio,  120.  *  Hood  v.  McNaaghton,  54  N.  J.  Law« 
•  fBllmui  V. Uptoii«  96  U.  & 328;  see  425;  24  AtL  497. 

171 


§  122  moaBPOiuTioii  ahd  ^MZhasxm  of  o(«fobatioii&  [past  l 

tills  matler  is  regalated  bj  stipule.   In  Maine,  Massachosetts, 

North  Carolina,  West  Virginia,  the  original  subscriber  alone  is 
liable.  In  Illinois,  Iowa,  Nebraska,  New  Hampshire,  Rhode 
Island,  and  Virginia  the  original  subscriber  remains  liable  as  well 
as  the  transferee.^  In  Georgia,  Ohio,  Tennessee,  and  Oregon  the 
original  sabseriber  is  liable  upon  default  in  payment  bj  the  tfans- 
feree.  In  Mississippi  and  Wisconsin  the  original  subscriber 
remains  liable  for  the  debts  contracted  before  his  ownership  or 
those  contracted  thereafter.  In  California,  Indiana,  Kentucky, 
Maryland,  Michigan,  Minnesota,  New  York,  and  Tennessee  the 
original  sabseriber  remains  liable  for  the  debts  of  the  corpcmtion 
oontraeted  during  his  ownership  and  not  for  debts  contracted  after 
such  transfer.  In  Alabama,  Arizona,  Arkansas,  Colorado,  Con- 
necticut, Delaware,  District  of  Columbia,  Florida,  Idaho,  Kansas, 
Louisiana,  Massachusetts,  Minnesota,  Missouri,  Montana,  New 
Jersey,  North  Dakota,  Oklahoma,  Pennsylvania,  South  Carolina, 
-  Sonth  Dakota,  Texas,  Utah,  Vermont,  Washington,  and'  Wyoming 
upon  tiie  transfer  of  stock  the  transferee  becomes  liable  for  all 
debts  contracted  both  before  and  after  transfer,  and  the  transferor 
is  discharged  in  all  these  States  as  to  debts  contracted  after  such 
transfer,  and  in  some  of  these  States  from  iiabilitj  for  debts  con- 
tracted before  such  transfer  as  well.^ 

Turning  now  to  the  question  of  liability  of  pledgees  and  trustees 
of  stock,  it  may  be  said  that  unless  protected  by  statute,  as  is  the 
case  in  New  York,  Missouri,  California,  and  Michigan,  the  pre- 
vailing rule  seems  to  be  that  pledgees  and  trustees  of  stock  are 
Uable  tiiereon  to  the  extent  of  tiie  unpaid  portion  of  the  stock  held 
bj  tliem.* 

On  the  other  hand  the  Supreme  Court  of  the  United  States  has 

enunciated  a  different  doctrine  to  the  effect  that  a  pledgee  of  stock 
taken  as  collateral  security  or  as  a  loan  is  not  subject  to  personal 
liability  for  the  debts  of  the  corporation  imposed  on  other  share- 
holders unless  he  has  either  become  the  owner  of  the  shares  in  fact 
or  has  held  himself  out  to  be  the  owner,  and  thereby  estopped  hini* 
self  from  denying  his  personal  liability  as  such.^ 

1  White  V.  Greene  (lowm),  70  N.  W.  65  S.  W.  630 ;  Germania  National  Bank 
182;  Spragne  v.  'BamX,  172  IB.  149;  50  ».  Caee,  99  U.  8.  m;  MeMahon  vu  Macj, 

N.E.  190.  51  N.  Y.  155. 

2  Van  Cott  V.  Van  Brant,  82  N.  Y.  535.  *  Rankin  ».  f.  L  T.  4  D.  18i 
«  Hole  V.  Walker,  31  la  344;  Union  U.  S.  242. 

SaWngs  Ass'n  v.  SeligmaQi  92  Mo.  635; 

172 


CHAP,  v.]  LBGtMATIVB  GONTBOL  OTEB  DOMESTIC  COBPOBATIONS.  §  122 

(5)  Doahle  liahility  as  established  by  statute  in  certain  States. 
What  is  known  as  the  "  double  liabilily  "  of  stockholders  for  debto 
of  the  corporation  which  existed  formerly  in  a  large  number  of 
States,  has  now  been  so  far  removed  by  statute  that  it  exists  at 
ttie  ^esent  time  in  the  case  of  ordinary  business  corporations  in 
only  two  States,  to  wit,  Califoniia  and  Minnesota.^  In  the  last- 
mentioned  State  it  does  not  exist  in  the  case  of  corporations 
organized  exclusively  for  the  purpose  of  carrying  on  a  mannfao- 
turing,  mining,  or  mechanical  business.* 

(c)  Special  liability  as  established  by  statute  in  certain  States. 
Stockholders  at  common  law  were  not  liable  for  debts  of  the 
corporation  beyond  their  liability  for  unpaid  stock  subscriptions.* 
Personal  responsibility  of  stockholderg  is  iaeonsistent  with  Ibe 
conception  of  corporate  liability  at  common  law,  and  for  this 
reason,  if  it  exists  at  all,  must  rest  upon  some  positive  statute  * 

The  particular  liability  under  consideration  here  arises  by 
reason  of  the  existence  of  statutory  provisions  that  may  be  stated 
as  follows :  Liability  of  incorporators  as  partners  Oirough  failure 
to  legally  organize  the  corporation.   In  Florida,  Iowa,  Minnesota, 
Nebraska,  and  Wisconsin  stockholders  are  individually  liable  by 
Statute  for  failure  to  comply  with  certain  prescribed  regulations  in 
regard  to  orgwiization  and  publicity."  In  a  few  of  the  States  the 
courts  construe  the  liabUity  of  incorporators  where  they  have  failed 
to  legally  organize  the  corporation,  not  as  partners  at  alL  This 
on  the  ground  that  no  such  relationship  or  liability  is  contemplated 
by  the  incorporators,  and  that  the  creditors'  only  remedy  is  against 
the  officers  and  agents  who  actually  made  the  contract.^ 
In  Indiana,  Massachusetts,  Michigan,  New  York,  North  Dakota, 

1  The  liability  may  possibly  still  exist  N.  J.  Law,  62;  Ciar  v.  Iglehart,  3  0.  St. 
in  Indiana  and  Kansas;  see  pages  257, 265.  457-  „    ,  w 

2  Sacramento  Bank  v.  Pacific  Bank.  «  *? J^^^St  *  JcZL 
124  Cal  147;  56  Pac.  787;  Danielsonv.  772;  Fnltor  ».  Row«,S7  N.  Y.18;  Oooaor 
Yoakum,  116  C.L 882 ;  48 P*c  M ;  N.H.  r.  Abbot.  85  Arit  366 ;  ^o^^^^ 
H.  N.  C<!.  V,  Company,  142  Mass.  349  ;  7  84  Minn.  355  ;  25  N.  W.  .99 ;  Hurt  i;. 
H.  B.  773 ;  Bates  rSay,  198  Pa.  St.  513 ;  Salisbury,  55  Mo.  310  ;  Bergeron  Hobbs, 
48  Atl.  407  ;  Whitman  r.  Bank,  176  U.  S.  96  Wis.  641 ;  71  N  W.  056;  Clegg 
559;  Willis  V.  Mabon,  48  Minn.  140;  Company,  «  low^  121 ;  15  N.  W.3W. 
50  N.  W.  11 10 ;  Marshall  v.  Sherman,  148  Slocum  ».  Head,  105  WIfc  481 .  Bl «.  W. 

^^^^1^497^^^^  Ward  .  BHgham,  127  Mass.  24; 

"^^-t"^^^^  224;  Rutherford     Hill,  22  Ore.  218;  25  Pa. 

25  N.  E.  218;  Hood     McNanghton,  54  646;  Canfield     Gregory  66  Conn.  9,  38 

N.  J.  L.  425 ;  24  Atl.  497.  AtL  636 ;  Bank  v.  HaU,  35  0.  St.  158. 
*  S.  I*  C.  N.  Bank  v,  Hendrickson,  40 


§  123  mOOBPOSATnm  and  OBOAmZAffON      OOBPOBAnONS.  [PABT  I. 

Oklahoma,  BmnsjlTania,  Soath  Dakota,  Tennestee,  and  Wiscon- 
sin they  are  liable  for  the  wages  of  employees  of  the  corporation. 
In  New  Tork,  in  what  is  known  as  full  liability  corporations, 
stockholders  are  liable  for  debts  of  the  corporation  in  full.  In 
Arkansas,  Delaware,  Iowa,  Maine,  Michigan,  Minnesota,  New 
Hampshire,  New  Jersej,  North  Gardina,  Vermont,  and  West 
Virginia  stockholders  are  indlTidnally  liable  to  the  extent  of 
any  part  of  the  corporate  assets  refunded  to  them  respectively. 
In  Idaho,  Minnesota,  North  Carolina,  and  South  Carolina  stock- 
holders are  individually  liable  for  any  fraud  or  misconduct  on 
their  part  In  Arizona,  Delaware,  Iowa,  and  Nebraska  stock- 
holders are  penKmally  liable  for  the  debts  of  the  corporation, 
nnless  they  limit  this  liability  by  provision  therefor  in  the 
charter.! 

§  123.  Statutory  UabiUty  of  Directors.^  With  the  exception 

ai  a  Tery  limited  number  of  States,  all  of  the  Commonwealths 
have  statotes,  either  ciril  or  penal,  imposing  liability  upon 
directors  for  certain  designated  acts,  of  misfeasance  or  non- 
feasance. These  statutes  are  diverse  both  in  scope  and  charac- 
ter. It  will  only  be  possible  in  this  connection  to  enumerate 
withont  discussion  tiie  several  liabilities  thus  imposed  up<m 
directors. 

(1)  For  illegal  declaration  of  dividends.* 

(2)  For  illegal  withdrawal  of  capital  stock.^ 

(3)  For  making  false  reports,  or  keeping  false  books  of 
account,  or  making  false  representations.^ 

^  Tan  Ml  V.  GwdiMr,  54  Veb.  701;  FHtsbarg,  etc.  B.  R  Co.  v.  AUaghtDT  Co., 

TftN.  W.  974.  iS  Flk.  St  1S6. 

«  Such  liabUity  exists  in  Alaska,  Ar-       «  Such  liability  exists  in  Alaska,  Cali- 

kansas,  California,  Colorado,  Connecticut,  fornia,  Connecticut,  Georgia,  Idaho,  Iowa, 

Delaware,  District  of  Columbia,  Florida,  Mississippi,  Montana,  Nevada,  New  Jersey, 

Georgia,  Idaho,  Illinois,  Indiana,  Iowa,  New  Mexico,  North  Carolina,  Oklahoma, 

Kanaas,  Kentncky,  Maine,  Maryland,  Mas-  Oregon,  South  Dakota,  Washington,  and 

MdniMtta.  Midlgaa,  Mfnawta,  MiMfa-  Wert  Vii^nia. 

sippi,  Missouri,  Montana,  Nebraska,  *  Such  liability  exists  in  Delairara, 
Nevada,  New  Hampshire,  New  Mexico,  District  of  Columbia,  Indiana,  Kentucky, 
New  Jersey,  New  York,  North  Carolina,  Montana,  Nevada,  New  Hampshire,  New- 
North  Dakota,  Ohio,  Oklahoma,  Ore-  York,  Rhode  Island,  South  Carolina,  Ten- 
gon,  Pennsylvania,  Rhode  Island,  South  nessee,  and  Virginia.  See  Huntington  r. 
Dakota,  Tenneawe,  Texas,  Yermoat,  yii>-  AttrOl,  118  N.  T.  865  ;  23  N.  E.  544; 
ginia,  Washington.  West  Virginia,  Wia>  Gidding  v.  Holter,  19  Mont  268  ;  48  Fte. 
consin,  and  Wyoming.  See  Dvkman  v.  8;  Felker  v.  Company,  148  Mass.  226 ;  19 
Keeney,  160  N.  Y.  677;  54  N.*E.  1090;  N.  E.  225;  Githers  v.  Clarke,  158  Pa.  St. 
Chamberlain  v.  Company,  118  Mass.  552;  616;  28  AtL  282;  Tlioffl|Moii  Hoostoa 
174 


CHAP,  v.]  LEGISLATIVE  CONTROL  OVER  DOMESTIC  CORPORATIONa  §  123 


(4)  For  failure  to  file  annual  reports.* 

(5)  For  violation  of  express  statutes.^ 

(6)  For  authorizing  the  contractioii  of  debts  in  excess  of  the 
amount  limited  by  law.* 

(7)  For  contracting  debts  before  statutory  requirements,  such 
as  subscriptions  for  stock,  either  in  whole  or  in  part,  publication 
of  articles,  etc.,  have  been  complied  with.* 

(8)  For  failure  to  file  certificates  as  to  reduction  of  capital 
stock.* 

(9)  For  false  oaths  to  articles  of  incorporation.* 

(10)  For  making  loans  to  directors.' 

(11)  For  making  loans  to  stockholders.^ 

(12)  For  loss  of  funds  through  negligence,* 

(13)  For  failure  to  display  name  or  itemized  accounts  at 
domiciliary  office.^ 

(14)  For  failure  to  allow  inspection  rf  books.^ 


Electric  Co.  v,  Uumj,  60  N.  J.  L.  20; 
37  Atl.  443. 

1  Such  liability  exists  in  Colorado, 
Michigan,  Montana,  New  Hampshire,  New 
T<»k,  and  Oklahoma.  See  Gairison  v, 
Howe,  17  N.  Y.  488;  Van  Btten  v.  Eaton, 
19  Mich.  187;'  Shanklinv.  Gray,  111  Cal. 
88 ;  43  Pac.  399  ;  Cincinnati  Cooperage  Co. 
V.  O'Keeffe,  120  N.  Y.  603 ;  24  N.  E.  993  ; 
Wallace  v.  Walsh,  125  N.  Y.  26 ;  25  N.  B. 
1076 ;  Glenn  IWls  Paper  Co.  ».  White,  18 
Han  (N.  Y.),  214;  Bolen  v.  Crosby,  49 
N.Y.  183 ;  Tabor  v.BMk,  68  Fed.  888;  10 

C.  C.  A.  429. 

2  Such  liability  exists  in  Arkansas, 
Idaho,  Indiana,  Kentucky,  Michigan, 
North  Dakota,  and  South  Dakota.  See 
Ftettenon  v.  Stewarl,  41  Minn.  84;  42 
N.  W.  986 ;  Lorevin  v.  McLaaghlin,  161 
HL  417  ;  44  N.  E.  99 ;  Clow  v.  Brown,  150 
Ind.  185;  48  N.  E.  1034  ;  49  N.  E.  1057  ; 
Gnnther  v.  Company,  21  £y.  L.  Bep.  655 ; 
52  S.  W.  931. 

8  Such  liability  exists  in  California, 
Illinois,  Idaho,  Mississippi,  Montana,  New 
Hampshire,  New  Mexico,  North  Dakota, 
Oklahoma,  Khode  Island,  Tennessee,  Ver- 
mont, and  Wyoming.  See  Tradesmen 
Pub.  Co.  V.  Company,  95  Tenn.  634 ;  32 
8.  W.  1097;  Lewis  v.  Montgomery,  145 
111.30;  33N.B.880;  Honor 9. Heaniiig^ 
88  U.  S.  988. 


*  Such  liability  exists  in  Illinois,  Ohio, 
Vermont,  and  Wisconsin.  See  Kent  v. 
Clark,  181  lU.  287 ;  54  N.  B.  967;  Ckwr  v. 
Brown,  110  Ind.  185 ;  48  N.  B.  1084;  48 
N.  B.  1057 ;  Hequembourg  v.  Edward^ 

155  Mo.  514;  55  S.  W.  490;  Loverin  v. 
McLaughlin.  161  111.  417  ;  44  N.  E.  99. 

6  Such  liability  exists  in  Indiana.  New 
Jersey,  and  North  Carolina. 

•  Such  liability  exists  in  MaHadiBscllB. 

7  Sach  liabOity  exists  in  Massachusetts 
and  New  York.   See  Thacher  v.  King, 

156  Mass.  490;  31  N.  E.  648;  Connecticut 
River  Bank  v.  Fiske,  62  N.  H.  178;  Wit- 
ters V.  Sowles,  31  Fed.  1. 

8  Such  liability  exists  in  District  of 
Cdnmbia,  Mississippi,  Missovri,  New 
Hampshira,  New  Yoric,  Oklahoma,  Ehode 
Island,  and  Tennessee.  See  Working- 
men's  Banking  Co.  v.  Rautenberg,  103 
HI.  460 ;  Bank  Commissioners  v.  Bank  of 
Buffalo,  6  Paige  (N.  Y.),  497. 

9  Snch  liability  exists  in  Minnesota. 
See  Horn  SXlrw  Mining  Go.  v.  Ryan,  42 
man,  196 ;  44  N.  W.  56 ;  M.  F.  N.  Bank 
V.  Harper,  61  Minn.  375 ;  63  N.  W.  1079. 

10  Such  liability  exists  in  California 
and  New  Jersey.  See  Eyre  v.  Harmon, 
92  Cal.  580 ;  28  Pac.  779 ;  Ball  v.  Toman, 
119Cal.85;  51  FlM.  546. 

u  Sn^liabili^adstsinllewJinMr. 

175 


§  I24t  mocmmknom  \m  mAmzAnoN  of  cobporahoms.  [piet  l 

(15)  For  embeBzlemeiit  <^  officers.^ 

(16)  For  faihire  to  make  eeriafieate  of  payment  of  capital 

8tOCk.2 

(17)  For  making  false  appraisal  as  to  value  of  property  taken 
in  exchange  for  corporate  stock.^ 

(18)  For  not  producing  liat  of  stockholders  at  the  annual 
election  of  directors.* 

(19)  For  permitting  an  illegal  issne  of  stock  or  bonds.* 

(20)  For  making  prohibited  transfers  of  property 

(21)  For  issuing  stock  as  full  paid  when  less  than  its  par 
yalue  is  paid  thereon  J 

§  124.  of  CkxKpmts  Batalmoe. —  In  order  to  extend 

corporate  existence  speciid  kgislatire  action  is  liecessary.^  In 
nearly  all  of  the  States  statutes  exist  providing  that  for  a  period 
of  three  years  after  the  term  of  existence  limited  by  its  charter 
has  expired,  the  corporation  shall  continue  to  exist  for  the  pur- 
pose of  winding  np  its  affidrs.  Express  power  to  extend  cor- 
porate existence  is  granted  in  twenty-^ve  of  tiie  Commonwealths.* 

Where  corporations  are  permitted  under  their  charter  to  make 
their  term  of  existence  perpetual,  this  right  to  extend  corporate 
existence  is  of  very  little  practical  importance.  As,  however, 
perpetual  existence  is  permitted  in  only  twenty-seven  of  the 
Sta^  it  is  a  qfoestion  cf  much  practical  importance  in  the  re- 
mainder. It  has  been  held  by  at  least  one  court  <^  excellent 
repute  that  where  the  power  of  amendment  of  the  charter  is 
unlimited,  even  though  it  does  not  refer  specifically  to  the  right 
to  extend  corporate  existence*  it  may  nevertheless  be  used  for 
that  pnrpoae.^ 

When  so  extended,  it  must  pay  an  orgaidsation  tax  if  tiie  law 

1  Such  liability  exists  in  Colorado,  New  »  Such  liability  exists  in  North  Dakota 
Mexico,  and  Pennsylvania.  See  Scott  v.  and  New  York.  See  Clow*.  Blown,  150 
Depeyster,  1  Bdw.  Ch.  (N.  T.)  513;  Ind.  185;  4S17.  B.  1084. 

Wallace  v.  Bank,  89  Temi.  630 ;  13  S.  W.  *  Such  liability  exists  in  New  York. 

48  ;  Oudcrkiik  «i  Bttik,  lit  N.  Y.  S68 ;  S8  ?  Snch  liability  exists  in  North  Dakota. 

JS.  E.  875.  See  Schley  v.  Dixon,  24  Ga.  273. 

2  Such  liability  exists  in  Colorado,  »  People  v.  Pfister,  57  Cal.  532 ;  Attor- 
Delaware,  Maryland,  New  Hampshire,  ney-General  v.  Perkin,  73  Mich.  303; 
North  Carolina,  and  Bliode  Uand.  Smith  v.  Company,  58  N.  J.  Sq.  881 ; 

*  Snek  UaUlitf  exkte  in  Conaeetient.  48       587 ;  People  v.  Greene,  116  Mich. 

See  Hequembourg  v.  Edwards,  155  Mo.  505  ;  74  N.  W.  714 ;  Frostberg  Mining  Ca. 

514 ;  56  S.  W.  490;  F.  C.  T.  Ca  »,  Sloyd,  v.  Company,  81  Md.  28 ;  31  Atl.  698. 
47  0.  St.  525 ;  26  N.  E.  110.  »  See  Part  III.  Table  8,  page  576. 

«  Such  liability  exists  in  Delaware  and     >0  People  v.  Greene,  116  Mich.  505; 

Hew  Jersey.  74  N.  W.  714. 

176 


CHAP.  T.]  LjSSII^ATiyE  CONTBOL  OYER  DOMTCIC  COBPORATIOMB.  §  125 

80  provides,  eyen  though  existence  is  extended  under  guise  of  an 
amendment.^ 

§  125.  Taxation  of  Domestic  Corporations.  —  Legislative  control 

over  domestic  corporations  is  exercised  by  means  of  the  un- 
questioned right  of  such  legislatures  to  impose  a  tax  upon, 
their  organization  and  annuallj  thereafter  in  the  form  of  a  fran- 
chise tax.   The  latter  may  be  defined  to  he  a  tax  levied  by  the 

State  upon  the  capital  of  a  corporation  in  return  for  the  privilege 
of .  exercising  its  corporate  powers  within  the  limits  of  the  State 
levying  such  tax.  On  the  general  subject  of  franchise  tax  the 
New  York  Goort  of  Appeals  in  a  recent  case^  spoke  as  follows : 

''The  system  of  taxation  in  this  State  is  so  complicated  as  to 
invite  mistakes  on  the  part  of  those  who  are  called  upon  to  enforce 
the  law.  In  some  instances  the  tax  is  laid  upon  property  and  in 
others  upon  rights  and  privileges  connected  with  the  property. 
There  is  direct  taxation  of  real  estate  and  of  some  personal  property, 
indirect  taxation  of  other  personal  property,  taxation  of  the  capital 
stock  of  corporations  and  of  their  franchises,  taxation  upon  the  right 
of  succession  to  the  property  left  by  decedents,  and  the  like.  .  .  . 

"  There  is,  first,  an  organization  tax,  payable  to  the  State,  which  is 
imposed  but  once,  and  is  exacted  for  the  privilege  of  becoming  a  cor- 
poration. Next,  there  is  a  tax  upon .  the  real  estate  owned  by  tiie 
corporation  in  this  State,  which  is  assessed  the  same  as  if  it  were 
owned  by  an  individual.  The  personal  property  of  the  corporation 
is  not  directly  taxed,  but  its  capital  stock  and  surplus  after  deduct- 
ing  the  assessed  value  of  its  real  estate  and  making  some  other 
deductions,  is  assessed  at  its  actual  value.  Finally,  there  is  a  fran- 
chise tax  on  corporations  which  is  payable  annually  to  the  State, 
'  computed  upon  the  basis  of  the  amount  of  its  capital  stock  employed 
within  this  State.'  This  is  not  a  tax  upon  property,  although  it  is 
measured  by  the  value  of  property,  but  upon  the  right  of  a  corpora- 
tion to  exist  and  exercise  the  powers  granted  by  its  charter.  These 
forms  of  taxation  do  not  all  rest  upon  the  same  principle.  The 
organization  tax  is  in  the  nature  of  a  license  fee  for  the  right  to 
become  a  corporation.  The  tax  upon  real  estate  is  a  direct  tax  upon 
real  property,  while  the  franchise  tax  is  not  laid  upon  property  at 
all,  but  is  imposed  upon  the  corporation  for  the  privilege  of  carrying 
on  business  in  this  State  and  exercising  the  corporate  franchises 
granted  by  the  State.    The  distinction  between  a  tax  upon  the  prop- 


1  Nl.  Lead  Co.  v.  Dickinson  (N.  J.),  ^  People  ex  rel.  etc.  v.  Knight,  174  N.  Y. 
57  Atl.  138.  475 ;  67  K.  E.  65. 

IS  177 


§  126  INOOBFOIUXIOII  AKD  OROANIZAIION  OF  COBPOaAIIONS.  [PABT  U 

erty  of  a  corporation  and  a  franchise  tax,  althougli  well  established 
and  of  great  importanoe^  is  easily  owlooked,  as  we  find  from  oiir 
own  experienee.''  , 

With  reference  to  organization  taxes  there  can  be  no  qnesUon 
raised  as  to  the  constitotimiality  of  sudi  taxation.^ 

The  constitutionality  of  franchise  taxes  being  imposed  npon 
the  franchise  as  a  species  of  property  is  clearly  within  the  con- 
stitutional powers  of  State  legislatures In  all  of  the  States  and 
Territories,  with  the  exception  of  Alaska,  Arkansas,  District  of 
Columbia,  Georgia,  Indian  Territory,  and  (^khoma,  graduated 
organization  taxes  are  imposed  upon  demesne  ecHrporations. , 

With  respect  to  annual  franchise  taxes  these  are  imposed  only 
in  the  States  of  Alabama,  Colorado,  Delaware,  Maine,  Massachu- 
setts, New  Jersey,  New  York,  North  Carolina,  Ohio,  Oregon, 
Fennsylvaniay  Soulli  Carolina,  Texas,  Vermont,  Washington,  and 
West  Yirginia.  In  Alabama,  G<dorado,  Ifune,  North  Carolina, 
Oregon,  South  Carolina,  Texas,  Vermont,  Virginia,  Washington, 
and  West  Virginia  the  tax  is  levied  upon  the  total  amount  of 
authorized  capital  stock,  irrespective  of  the  amount  that  may 
have  been  issiied  and  outstanding. 

In  Delaware,  Massachusetts,  New  Jersey,  and  Ohio  the  tax 
is  graded  according  to  the  amount  of  capital  stock  issued  and 
outstanding.  In  New  York  the  tax  is  determined  largely  by  the 
dividends  on  the  par  value  of  the  amount  of  capital  stock 
authorized.  It  is  also  graded  on  the  amount  of  capital  stock 
employed  within  the  State. 

§126.  Regnlatton  off  tte  Rl#tt  of  GooMlldatloii.  —  To  accomplish 

a  valid  consolidation  of  two  corporations  that  are  organized  under 
the  laws  of  the  same  or  of  different  States,  legislative  authority  is 
necessary.  It  is  not  over-stating  the  matter  to  say  that  legisla- 
tive anthoriiy  is  as  necessary  for  the  accomplishment  of  a  valid 
consolidation  of  existing  corporations  as  it  is  to  the  creation  of  a 
corporation  in  the  first  instance.'   Any  attempt,  therefore,  on  the 

1  United  Horseshoe  Works  v.  Lewis,  ^  Society  for  Savings  v.  Coit,  6  Wall. 

1  Abb.  (U.  S.)  518;  Fed.  Cas.  No.  14365;  (U.  S.)  594;  Tidewater  Pipe  Line  Co.  v. 

Combined  Saw  &  Planer  Co.  v.  Flournoy,  Berry,  53  N.  J.  L.  212 ;  21  AtL  490; 

88  Va.  1029  ;  14  S.  E.  976 ;  State  r.  Bot-  Attomey-GeBwal  ».  Bi^"  State  Hining 

Witt,  17  Moot.  41 ;  41  Fte.  1004;  HngiiM'  Co.,  99  Man.  148. 

dale  ]f%.  Cou  v,  Yttaer,  12  R.  L  491 ;  »  Pearce  v.  Company,  22  How.  (XT.  S.) 

Jones  V.  C6lllpBi7,  SI  GoL  S63;  40  Pac.  441 ;  A.  L.  &  T.  Co.  v.  Company,  157  111. 

457.  641 ;  42  N.  E.  153  ;  Cole  v.  Companj,  133 

N.  Y.  164;  30  N.  E.  847. 

178 


OHAP.  v.]  LEGISLATIVB  CONTROL  OVER  DOMESTIC  CORPORATIONS.  §  126 

part  of  corporations  to  consolidate  in  the  absence  of  any  statute 
permitting  consolidation  will  not  be  rec(^ized  hj  the  courts.^ 
Where  power  is  granted  to  corporations  to  consolidate  it  is  nsoally 
done  by  means  of  a  general  statute.  Such  statutes  exist  in  a 
comparatively  small  number  of  the  Commonwealths,  the  legis- 
latures of  the  remaining  States  evidently  looking  upon  consolida- 
^n  as  a  form  of  a  trust  and  therefore  to  be  restricted.^  Some  of 
the  statutes  limit  the  right  of  consolidation  to  corporations  of  the 
same  character  or  engaged  in  the  same  line  of  business.'  Where 
the  right  to  consolidate  existed  at  the  time  the  corporation  was 
created  it  can  ordinarily  be  affected  by  vote  of  a  majority  of  the 
stockholders  against  the  dissent  of  the  minority.*  However,  in 
tlie  absence  of  such  aui^ority  conferred  prior  to  the  ineorponitioii 
of  a  company,  it  has  been  held  that  consolidation  ouwol  be 
affected  against  the  dissent  of  the  minority  stockholders.* 

When  it  comes  to  the  matter  of  consolidation,  creditors  have  no 
right  to  interyene  for  the  purpose  of  preventing  such  a  consolida- 
tion providing  the  same  is  undertaken  under  l^islative  authoritj. 
The  remedy  of  creditors  in  such  cases  is  to  proceed  in  equity  with 
a  view  to  subjecting  the  property  of  the  consolidated  corpora- 
tion to  the  payment  of  their  claims.^  Sometimes,  though  not 
always,  when  a  new  corporation  is  formed  by  the  consolidation 
of  a  demesne  corporajtion  with  a  foreign  corporation,  it  is  required 
to  pay  an  organization  tax,  at  least  npon  so  much  of  the  capital 
stock  as  is  represented  by  the  capitalization  of  that  of  the  consoli- 
dated domestic  corporation.* 

1  GreenyOle  Waxehoiue  Frees  Co.  v.  Wit.  18;  Mowi^  v.  Gompany,  4lliww!1, 
Company,  70  Uim.  669 ;  13  So.  879.  78 ;  Fed.  Cas.  Na  9891. 

2  See  Part  IIL  Table  9,  page  579.  «  People  v.  Company,  92  N.  Y.  105. 
8  See  In  re  Prospect  Park  &  Coo»J  See  R.  I.  Ry.  Co.  v.  Moffatt,  75  111.  524 ; 

Island  Railway  Co.,  67  N.  Y.  371.  N.  D.  Ry.  Co.  v.  Company,  120  Mass.  397. 

*  Spero  V.    Company,  7   Ind.  369;  '  State  v.  Sherman,  22  O.  St.  411 ;  P. 

Sprague  v.  Company,  90  111.  174.  Ghk  ».  Company,  113  U.  S.  296 ;  A.  4  R. 

•Clearwater  v.   Meredith,  1  WalL  A.^t<.  Co.  t>.  State,63  G«.  S188;  ooafra, 

|U.&)SS;K.4B.LBy.0o.v.Maisli,17  Feople  «.  ConpMiy,  ia»  M.  Y.  474;  SI 


179 


§  127  INOOBPOBATIOM  AND  OBOAMtZATIOK  OF  OOWO&AXEOlia.  [PABt  L 


t 


c     CHAPTER  VL 

LEGISLATIVE  CONTROL  OVER  FOREIGN  CORPORATIONS. 

§  127.  Ziztent  of  Legislative  Power  of  the  various  Commonwealths 
over  Foreign  Corporations.  — A  foreign  corporation  maj  be  defined 
as  one  created  under  tlie  laws  of  a  State,  Territory,  goyeminent, 
or  conntrj  other  t^aa  that  wherein  it  seeks  to  do  business.^ 
With  some  few  exceptions  nearly  all  of  the  Commonwealths  have 
enacted  statutes  prescribing  the  terms  and  conditions  upon  which 
foreign  corporations  may  carry  on  business  within  their  borders.* 
Most  of  these  statutes  closely  resemble  each  o^r  in  charaotery 
and  generally  look  to  the  attainment  of  the  same  end.  Thus,  for 
example,  in  order  to  give  courts  of  the  foreign  State  jurisdiction 
over  the  foreign  corporation  and  to  secure  proper  protection 
for  such  of  its  citizens  as  may  transact  business  with  the  latter, 
the  statutes  prescribe  that  foreign  corporations  shall  designate 
an  agent  residing  within  the  State  upon  whom  service  of  process 
upon  the  corporation  may  be  served,  and  also  designate  a  place 
of  business  where  it  may  be  found.  Such  provisions  are  unques- 
tionably valid. 3 

Again,  most  of  the  acts  require  tliat  a  certified  or  sworn  copy 
of  the  charter  of  the  foreign  corporation  shall  be  filed  in  certain 
designated  offices,  usually  with  the  Secretary  of  State  and  in  the 
local  recording  office  of  the  county  where  its  principal  place  of 
business  is  to  be  located.  The  object  of  such  enactment  is  to  fur- 
nish easily  accessible  evidence  of  the  existence  of  the  corporation, 
and  to  protect  parties  dealing  with  it  from  fraud  and  impositicm.^ 

Still  other  States  require  iJie  filing  of  reports  enumerating  the 
officers,  giving  information  relative  to  the  business  to  be  trans- 
acted within  the  foreign  State  and  as  to  the  financial  condition 

1  My  V.  Coinpnij,  64  Ind.  1.  «  Evans  ».  Lee,  11  Ner.  IM ;  D.  P.  Co. 

«  See  Part  III.  Table  13,  page  583.  v,  Angmkiiie,  5  Wish.  67 ;  31  PSc  327 ; 

8  St.  Clair  v.  Cox,  106  U.  S.  356 ;  Huffman  v.  Company,  13  Tex.  Of.  Ap. 

Lafayette  Ins.  Co.  o.  Stench,  18  How.  169 ;  36  S.  W.  306. 
(U.S.)  404. 

180 


CHAP.  VI.]  LEGI^TIYB  CONTBOL  OTEB  fOBEIOM  C0EP0BATI0N8.  §  127 

of  the  corporation.^  The  right  to  transact  husiness  in  a  foreign 

State  is  a  matter  of  State  comity,  pure  and  simple.  The  recog- 
nition of  a  foreign  corporation  and  enforcement  of  its  contracts 
in  States  other  than  that  of  its  creation  rests  only  on  comity,  and 
any  conditions  governing  the  right  to  transact  business  outside  of 
the  domiciliary  State  of  the  corporation  may  be  imposed  upon  them 
or  they  may  be  entirely  excluded.'  But  the  conditions  imposed 
must  not  be  repugnant  to  the  Constitution  of  the  United  States 
or  to  the  public  policy  of  the  foreign  State  as  evidenced  by  its 
statutory  enactments  ^nd  judicial  decisions,  nor  can  they  be  re- 
pugnant to  rules  of  public  law.' 

In  this  connection  it  may  be  observed  that  foreign  corporations 
cannot  claim  the  protection  of  the  prohibition  of  the  United  States 
Constitution  against  denying  to  citizens  of  any  State  the  privileges 
and  immunities  of  citizens  of  the  several  States.*  Nor  can  they 
claim  the  benefit  of  the  clause  agamst  denying  to  any  person  equal 
protection  of  the  law.* 

A  State  may  preclude  all  foreign  corporations  not  engaged  in 
interstate  commerce  or  in  the  employ  of  the  general  government 
from  transacting  business  within  its  limits,  and  the  courts  cannot 
Inquire  into  ii»  reasons  for  so  doing.^  A  State  may  disorimmate 
between  foreign  and  domestic  corporations.^  In  short,  the  power 
of  States  over  foreign  corporations  with  respect  to  imposing  con- 
ditions for  doing  business  are  as  broad  as  those  exercised  over 
domestic  corporations.^  Wherever  a  corporation  transacts  its 
business  it  carries  its  charter  with  it,  and  that  becomes  the  law 
of  its  existence  in  the  foreign  State,  for  the  charter  is  the  same 
abroad  as  it  is  at  home.  Whatever  disabilities  are  placed  upon 
the  corporation  at  home  are  ordinarily  equally  binding  upon  it 
abroad,  and  whatever  proper  legislative  control  it  is  subject  to 
must  in  general  be  recognized  and  submitted  to  by  those  who 
deal  with  it  elsewhere.^  The  foregoing  rule  should  be  qualifie4 

1  WaOAngUm  County  Mnt  his.  Co.  v.  «  Doyle  v.  Company,  94  U.  S.  541  ? 
DaweB,  6  Gray,  Mass.  376.  Horn  Silver  Miiii«g  Co. ».  New  Yoik,  143 

2  Paul  V.  Virginia,  8  Wall.  (U.  S.)  161.  U.  S.  314. 

8  Lafayette  Ins.  Co.  v.  French,  1 8  How.  ^  Ducat  v.  Chicago,  1 0  Wall.  (U.  S.)  415. 

407 ;  S.  P.  Ky.  Co.  v.  Denton,  146  U.  S.  "  Orient  Ins.  Co.  v.  Daggs,  173  U.  8. 

201 ;  Am.,  etc.  Christian  Union  v.  Yount,  566. 

101  U.  8. 866.  '  •  Canada,  etc  Ry.  p.  Geblieid,  lOS  U.  8. 

*  Pani  V,  Vlfglnia,  8  Wall  (U.  S )  168.  697 ;  Isle  Royale  Land  Corporation  y.  Sea. 

6  P.  C.  S.  M.  A  C.  Co. ».  PWill^lnMJ^  <rf  State,  76  Mich.  162;  43  N.  W.  14, 
m  U.  S.  181. 

181 


§  127  INCOBPOBATION  AND  ORGANIZATION  OF  COBPOEATIONS.  [PABT  I. 

by  the  statement  that  a  foreign  corporation  can  do  no  act  in  a 
foreign  State  which  cannot  be  done  through  the  intervention  of 
a  mm  agent  and  whieh  is  not  in  eonlemiilation  oi  law  the 
direct  act  of  the  eorpc»ration  itsdf.^ 

Comity  between  States  anthorizes  a  corporation  to  exercise  its 
charter  powers  within  any  State,  but  it  does  not  permit  the  exer- 
cise of  a  power  where  the  policy  of  that  State  distinctly  marked 
by  legislatiTe  raactments  or  constitutional  provisions  forbids  it^ 
It  has  been  well  said  that  ^no  rule  of  comity  will  allow  one 
State  to  charter  cmporations  to  operate  im  another  State  unless 
there  is  willingness  on  the  part  of  the  foreign  State  that  it  should 
be  so.  To  hold  otherwise  would  be  to  say  that  the  right  of  one 
State  by  comity  is  superior  to  the  sovereign  will  of  the  other. 
This  invplyes  the  surrender  of  soTereignty  to  a  rule  of  cc»nity 
and  to  a  matter  of  IntemaMonal  etiquette,  which  no  sovereign 
State  should  for  a  moment  think  of."* 

A  great  deal  of  litigation  has  arisen  through  the  question 
whether  or  not  foreign  corporations  may  exercise  the  same 
powers  in  a  fordgn  State  that  their  charter  authorizes  them  to 
exercise  hi  ^  domestw  State.  It  has  been  held  that  fpreign  cor- 
porations cannot  exercise  outside  of  the  domicile  State  powers 
which  their  own  charters  do  not  permit  them  to  exercise  within 
the  State  of  their  origin,  nor  can  they  exercise  powers  in  a  foreign 
State  not  permitt^  to  corporations  organized  under  the  laws 
thereot^  They  camioty  howerw,  do  any  acts  whidi  are  oontrarj 
to  the  public  policy  of  the  foreign  State.*  Ncr  can  they  transact 
business  for  which  domestic  corporations  cannot  be  formed  on 
account  of  statutory  prohibition  thereof.^ 

In  some  jurisdictions  what  are  termed retaliatory  statutes " 
have  been  enacted.  The  purpose  of  these  statutes  is  to  put  cor- 
poraMmis  comii^  from  otlier  States  upon  the  same  plane  as 
domestic  corporatiohs  of  that  State  are  placed  when  they  seek 
in  turn  to  transact  business  in  the  States  referred  toj  Some- 
times the  laws  of  the  foreign  State  expressly  provide  that  foreign 

>  Pake  V.  Taylor,  37  Fla.  641 ;  Dema-  Mich.  145;  Clarke  v.  E.  R.  Co.,  50  Fed. 

restr.Flack,  128N.Y.  205;  28N.S.S45;  338;  State  v.  Water  Co.,  61  Kaa.  5«8; 

Colwell  V.  Company,  100  U.  S.  55.  People  v.  Howard,  50  Mich.  239. 

2  McDonoagh  v.  Murdoch,  15  How.  ^  L.  6.  B.  T.  Co.  v.  Commissioners,  6 

(U.  S.)  413.  Kan.  245. 

*  Empife  Mflk  v.  Company  (Tex.  Ap. ),  *  Empive  WDb  ».  Company  ( Tex.  Ap.)« 

U8.W.MM.  lft8.W.10S. 

i  Diamond  Ififtcb  Oa  «.  r^nuMb  SI  '  TUM  «.  Coapngr,  74  Mo.  544. 

182 


CHAP.  VI.]  LBOISLATIVB  CONTOOL  OVER  FOREIGN  CORPORATIONS.  §  127 

corporations  shall  have  no  rights  or.  privileges  other  than  those 
possessed  by  domestic  corporations  of  the  same  character.  A  fair 
interpretation  of  snch  statntes^onld  seem  to  be  that  such  foreign 
corporations  shall  have  equal  powers  with  domestic  corporalaons  <rf 
a  character  similar  to  their  own.^ 

In  a  recent  case  an  interesting  question  arose  as  to  the  legal 
effect  of  inserting  powers  in  a  charter  to  be  exercised  only  outside 
of  the  State,  snch  powers  being  forbidden  by  the  laws  of  the  State 
in  which  the  corporation  was  organized.*  In  l^is  ease  tbe  Fed- 
eral  Court  of  the  State  of  Washington  spoke  as  foUows : 

"It  has  become  a  habit  of  business  men  in  this  country  to  organize 
oorpo^ons  in  one  State  to  operate  in  another,  and  presumably 
there  is  some  advantage  to  be  gained  thereby,  otherwise  the  practice 
would  not  be  continued.  But  no  sound  reason  has  been  advanced, 
and  none  occurs  to  my  mind,  for  giving  additional  encouragement  to 
the  practice  by  judicially  expanding  the  powers  of  such  corpoKOaoni 
so  as  to  include  additional  rights  and  powers  to  be  exercised  abioad 
but  not  at  home.    Corporations  organized  under  legislative  statutes 
aie  not  endowed  with  the  rights  of  natural  persons  to  do  as  they 
please  except  when  restrained  by  prohibitive  laws.    On  the  contrary, 
the  rule  is  that  they  have  only  such  powers  and  rights  as  the  statutes 
confer,  and  the  enumeration  of  their  powers  implies  the  exclusion  of 
all  others  except  such  subordmate  and  incidental  rights  and  powers 
as  are  essential  to  their  existence  and      exeiciie  of  the  rights  and 
powers  conferred  in  express  terms,  and  <&e  corporation  can  make 
contracts  and  do  no  acts  other  than  permitted  by  the  State  whidi 
created  it  except  such  as  are  authorized  by  its  charter." 

The  general  rule  is  that  foreign  courts  will  not  interfere  in 
the  internal  man^ment  of  foreign  corporations;  that  is,  except 
in  the  presence  of  extraordinary  circnmstanoes.*  In  this  con- 
nection  a  distinction  obtains  where  the  act  complained  of  affects 
the  party  solely  in  his  capacity  as  stockholder,  for  there  he  must 
seek  redress  of  his  grievance  in  the  courts  of  the  domiciliary 
State  <rf  the  corporation.   Bnt  where  the  act  affects  his  individual 

1  See  K«.  15.  Art.  XIL  Calif<»iii».Coii.  «  Seattle  Gas  &  Electric  Co.  v.  Citizens' 

.titatioii;  sec.  11,  Art.  XV.  Montana  Con-  Light  &  Power  Co..  123  Fed.  588 ;  125  Fed. 

stitutions;  I.  &  M.  B.  Co.  v.  Stone,  174  1001. 

Mo  1  •  73  S.  W.  453  ;  MacGinniss  v.  Com-  •  Sidway  v.  Company,  104  Ve^  m^ 

pany  (Mout.),  75  Pac.  89;  Low©  v.  Com-  Kimbril  v.  Company,  157  MSM.  7;  81 

Dany.  52  Cal.  60.  S.  997. 

183 


§  128  INCOaPO&AnON  and  OSGANIZATIOli  OJP  COBPOfiATIONS.  [PABf  It 


rights  he  may  seek  redress  in  any  tribunal  where  jurisdiction 
may  properly  be  acquired.^  Foreign  courts  have  not  the  power 
to  forfeit  Charters  of  foreign  corporations.* 

Quo  warranto  is  the  proper  proceeding  to  try  the  right  of  a 
foreign  corporation  to  carry  on  corporate  business  in  a  foreign 

State.3 

The  certificate  of  the  Secretary  of  State  authorizing  a  foreign 
corporation  to  tnuisaet  budness  within  the  State  is  a  franchise 
emanating  from  the  State,  and  cannot  be  gone  behind  or  revoked 
by  any  authority  but  the  State.* 

§  128.  Doctrine  of  State  Comity.  —  What  is  known  as  the 

'^doctrine  of  State  comity"  is  nothing  more  nor  less  than  a 
recognition  of  the  prindple  that  the  right  of  foreign  corporations 
to  engage  in  business  in  a  State  other  than  that  of  their  creation 
depends  solely  on  the  will  of  such  other  State.^ 

Wliile  there  are  exceptions  to  this  rule  they  only  exist  where 
the  corporation  created  by  one  State  rests  its  right  to  enter 
another  and  engage  in  business  thereui  upon  the  nature  of  its 
business.  As,  for  instance,  where  it  is  necessarily  an  instrumen- 
tality of  interstate  commerce,  and  its  business  constitutes  such 
commerce,  it  is  therefore  wholly  within  the  paramount  authority 
of  Congress.  In  this  case  the  exceptional  business  is  protected 
against  interference  by  such  authority. 

If  the  power  to  regulate  applies  to  all  the  instances  to  which 
such  commerce  gives  rise,  and  to  all  contracts  which  might  be 
made  in  the  course  of  its  transactions,  that  power  would  embrace 
the  entire  sphere  of  mercantile  activity  in  any  way  connected 
with  the  trade  between  the  States,  and  would  exclude  State  con- 
trol over  many  contracts  purely  domestic  in  their  nature.  The 
power  to  exclude  where  it  exists,  embraces  the  power  as  well  to 
regulate  and  to  enforce  all  legislation  in  regard  to  things  done 
within  the  State  which  may  be  directly  or  incidentally  requisite  in 
order  to  render  the  enforcement  of  the  State  powers  efficacious 
to  the  fullest  extent,  subject  always  of  course  to  the  paramount 
authority  of  the  United  States.*  Let  us  now  turn  our  attention 

1  H.S.C.»ete.Co.v.Fieid,S47ed.151;      «  Stale  §»  r«{.  v.  Aekennan,  51  0.  St 
M.  R  T.  C&  V.  B.  O.  H  Go.,  SI  K.  Y.   163;  37  N.  E.  828. 

Sop-  302.  5  Hooper  v.  State  oi  Cmaadt^  189 

2  Fritts  V.  Palmer,  132  U.  S.  289.  U.  S.  148. 

«  State  V.  Ins.  Co.,  39  Minn.  538  ;  41       «  W.  U.  TeL  Co.     Mayer,  28  0.  Sti 

H.  W.  108.  521. 

184 


(3AP.  Yl]  LBOISLAiaVB  OOHTBOL  OVBB  FOmON  COBPOBATIONS.  §  128 


to  the  attitude  maintained  by  the  State  courts  towards  foreign 

corporations. 

One  of  the  familiar  features  of  the  present  day  is  the  organi- 
zation  of  corporations  under  the  laws  of  one  State  whose  statutes 
are  particularly  favorable  with  the  intention  of  carrying  on  no 
business  in  the  State  of  its  organiaation  and  with  the  avowed 
purpose  of  carrying  on  business  in  other  States.  Long  ago 
these  corporations  were  nominated  as  »*  tramp  corporations,**  and 
there  was  at  the  outset  some  effort  made  on  the  part  of  the 
courts  to  limit  the  powers  and  question  the  legal  status  of  such 
corporations.  There  was  an  attempt  made  to  induce  the  courts 
to  refuse  to  judicially  recognize  such  corporations,  and  to  hold  their 
stockholders  liable  upon  their  contracts  as  partners  and  upon 
their  torts  as  joint  tortfeasors.^ 

But  the  liberal  policy  of  the  American  States  in  extending 
hospitality  to  foreign  corporations  and  the  powerful  influence  of 
interstate  comity  has  completely  overcome  the  tendency  here 
referred  to,  so  that  at  the  present  day  the  doctrine  is  established 
in  practically  every  State  in  the  Union,  that  each  of  these  States 
will  recognize  as  valid,  a  corporation  formed  under  the  laws  of 
another  State  for  the  express  purpose  of  doing  business  outside 
of  the  State  of  it»  origin.* 

The  broader  view  taken  by  the  courts  on  this  question  is  well 
set  forth  by  the  decision  of  the  New  York  Court  of  Appeals  in 
Merrick  v.  Van  Sanvoort.^  In  this  case  attempt  was  made  to 
establish  the  doctrine  that  where  a  Connecticut  corporation 
conduct*  all  its  business  in  the  State  of  New  York,  it  must 
thereby  be  deemed  to  have  migrated  to  New  York  and  to  have 
forfeited  its  charter,  thus  permitting  creditors  of  the  corporation 
to  hold  the  members,  officers,  and  agents  of  the  corporation  per- 
sonally liable  for  the  debts  and  torts  of  the  corporation.  In 
refusing  to  recognize  this  doctrine  the  court  spoke  as  follows: 

» 

« Hitherto  corporate  enterprise  has  not  been  trammelkd  bgr  un- 
friendly le gislation .  No  jealousy  or  competition  or  rivalry  of  adverse 
interest  has  been  permitted  to  convert  State  lines  into  barriers 

1  See  HiU  v.  Beadi,  12  N.  J.  Eq.  31  j       "See  Merrick  ».  Van  SuToort,  84 
Landgrant,  etc.  Co.  ».  Coffey  Co.,  6  Kan.  N.  T.  MS;  Denanet  v,  VM,  ISS  N.  Y. 
S45 ;  Montgomery     Forbes  148  Mass.  SOS ;  State  ex  rd, ».  Cook  (Mo.),  SO  S.  W. 
949;  19  N.  E.  342 ;  Attwbotry  v.  Knmt,  929. 
4B.Mi»iioe(K7.)>9<^  *S4N»T.m 

185 


§  128  VKCoamnumm  ard  OBGAmsAmm  of  ocmtcmknom.  Ttaxsi. 

of  obstnietkm  to  tiie  free  oonzse  of  genenl  oommeioe.  Its  ayeniies 
IiaTe  been  open  to  an. 

*  In  this  cmrntry  oxa  individual  interests  are  so  interwoven  that 
tbe  nnion  of  the  States  is  due,  in  its  continuance,  if  not  in  its  origin, 
as  much  to  commercial  as  to  political  necessity.  The  citizens  of  each 
claim  a  birthright  in  the  advantages  and  resources  of  all.  They 
demand  from  their. local  authorities  such  facilities  as  the  law-making 
power  can  afford  in  the  employment  of  labor  and  capital  They 
claim  snch  corporate  franchises  and  immunities  as  may  enable  them 
to  compete  on  equal  terms  with  the  eitixens  of  other  States.  For 
these,  with  the  stmctore  of  our  institations,  they  naturally  look  to 
their  own  goremment  They  acknowledge  a  double  allegiance  in 
their  local  and  federal  relations,  which,  by  general  consent,  carries 
with  it  a  correlative  community  of  rights.  They  may  live  in  an 
inland  State,  but  they  are  none  the  less  citizens  of  a  maritime  nation, 
and  they  may  lawfully  organize  companies  at  home  for  traffic  on 
ocean  highways. 

''A  corporate  charter  is  in  the  nature  of  a  commission  from  the 
Stale  to  its  eitiiens,  and  their  snooessofs  in  interest,  whether  at  home 
or  abroad.  Each  goTcmmen^  in  the  exereise  of  its  own  discretion, 
determines  the  eonditions  of  its  grant.  It  is  free  to  impose  or  omit 
territorial  restrictions,  but  it  can  confer  general  powers  to  be  exer- 
cised within  its  bounds  or  without  them,  wherever  the  comity  of 
nations  is  respected.  For  the  purpose  of  commerce  such  a  com- 
mission is  regarded  like  a  government  flag,  as  a  symbol  of  allegiance 
and  authority ;  and  it  is  entiUed  to  reoognitioa  abroad  until  it  forfeits 
a  recognition  at  home.  ... 

.  .  We  think  the  policy  of  this  State  is  in  harmony  with  that 
of  the  eonntry,  and  that  it  would  be  neither  provident  nor  just  to 
inaagorate  a  role  which  would  unsettle  the  security  of  corporate 
progerty  and  rights  and  exclude  others  from  the  enjoyment  here  of 
privileges  which  have  always  been  accorded  abroad.  Our  national 
commerce  is  but  the  aggregate  of  that  of  the  States,  and  every 
needless  restriction  by  the  operation  of  local  laws  is  unjust  and 
calamitous  to  all.  We  suppose  the  rules  of  comity  on  which  we  have 
hitherto  acted  to  be  generally  accepted  and  approyed.  We  see  no 
reason  why  a  Southern  State  may  not  grant  to  a  oorporation  of  its 
planters  the  right  to  ereot  mills  for  the  manufacture  of  their  cotton 
in  New  England;  nor  why  the  legislature  of  Massachusetts  may  not 
,  authoriie  a  company  of  Lowell  millers  to  raise  cotton  in  South 
America  or  the  Sea  Islands.  The  State  of  Illinois  touches  neither 
the  Atlantic  nor  the  Pacific ;  but  if  it  should  organize  a  company 

of  its  citizens  on  the  ocean  with  its  office  in  the  City  of  Jbfew  York 
186 


CHAP.  VI.]  LBGI8LATITB  OOMTBOL  OVEE  FOBSfGH  CORPORATIONS.  §  128 

and  its  business  conducted  by  managete  elected  annuaUy  in  Chicago, 
the  rights  of  the  corporation  would  be  reoognirod  wherever  the 
obligations  of  national  law  are  respected," 

Through  the  operation  of  interstate  comity  corporations  or- 
ganized under  the  laws  of  one  State  may  exercise  their  corporate 
powers  outside  of  the  geographical  limits  of  the  State  from  which 
they  have  obtained  their  charter.  The  doctrine  of  the  courts  on 
this  subject  is  well  set  forth  by  the  United  SUtes  Supreme  Court 
in  Cowell  v.  Colorado  Springs  Co.^  as  follows : 

w  By  the  general  comity  which,  in  the  absence  of  positive  direction 
to  the  contrary,  obtains  through  the  States  and  Territories  of  the 
United  States,  corporations  created  in  one  State  or  Territory  are  per- 
mitted  to  carry  on  any  lawful  business  in  another  State  and  Territory, 
and  to  acquire,  hold,  and  transfer  property  there  equally  as  indi- 
viduals. If  the  policy  of  the  State  or  Territory  does  not  permit  the 
business  of  the  foreign  corporations  in  its  limits  or  allow  the  cor- 
poration  to  acquire  or  hold  real  property,  it  must  be  expressed  in 
some  affirmative  way;  it  cannot  be  inferred  from  the  fact  that  its 
legislature  has  made  no  provision  for  the  formation  of  similar  corpo- 
rations  or  allows  oorppralaons  to  be  formed  only  by  general  law." 

A  moat  inatmctive  case  in  thia  immediate  connection  is  that  of 
Demarest  v.  Flack,'  wherein  the  New  York  Court  of  Appeala 
observed  that: 

"  The  courts  of  every  State  and  country  recognize  foreign  corporap 
tions  through  what  is  termed  national  or  State  comity.  But  whether 
such  recognition  shall  be  given  must  be  decided  by  the  courts  of  the 
country  where  the  corporation  seeks  to  do  business.   In  our  State,  as 
in  others,  it  is  a  question  of  domestic  policy,  and  what  that  policy  is 
must  be  determined  by  an  examination  of  our  own  legislation.  If  we 
find  any  direct  enactment  upon  the  subject,  it  is  our  duty  to  obey  it, 
and  in  its  absence  we  must  determine  the  question  with  reference  to 
our  general  legislation  and  to  the  circumstances  which  surround  us 
as  a  great  and  growing  commercial  community,  having  need  of  aiid 
employing  large  amounts  of  combined  capital,  and  fmr  whose  prosperity 
and  growth  it  is  of  the  utmost  importance  that  such  capital  should 
have  the  greatest  facilities  extended  it  for  useful  employment,  with 
reasonable  and  proper  personal  exemptions  from  liability.   We  can 
find  no  reason  for  a  domestic  policy  that  should  exclude  from  recog- 


1 100  U.  S.  55. 


«  128  N.  Y.  205j  S8N.E.  64S. 

187 


§  128  IHOOBPqftATIOlf  AKD  OBOAMISATION  OF  OOBIHHUIIOHS.  [PABTI. 


nitioa  by  our  courts  foreign  corporations  generally.  It  may  safely 
be  said  there  can  be  no  sncb  domestic  policy  at  the  present  day  in 
a  einlized  State.  ... 

**  An  examination  of  our  laws  shows  that  it  is,  and  for  many  years 
has  been,  the  policy  of  this  State  to  enlarge  the  facilities  for  the 
formation  of  corporations.  General  laws  are  on  our  statute  book  for 
the  formation  of  corporations  of  almost  every  conceivable  kind,  and 
under  some  one  of  them  a  corporation  of  the  kind  mentioned  in 
the  case  could  readily  be  formed.  The  freedom  from  personal  liability 
would  be  as  great  and  could  be  as  easily  attained  under  our  own  as 
under  the  laws  of  West  Virginia.  The  security  of  the  creditor  would 
not  be  substantially  greater  in  the  case  of  the  domestic  than  in  that 
of  the  foreign  corporation.  In  the  latter  the  creditor  has  the  remedy 
by  attachment,  and  he  can  obtain  about  as  easy  access  to  its  property 
as  if  it  were  domestic  instead  of  foreign. 

"  There  is  really  nothing  to  evade  by  incorporating  under  a  foreign 
law.   No  harmful  results  flow  to  a  creditor  or  to  the  community 
here  by  such  incorporation.   Where  the  oorpozatlon  formed  under 
another  jurisdiction  oomes  here  to  do  business  of  a  kind  which  we 
permit  to  be  done  by  corporations,  and  where  our  laws  provide  for 
incorporating  individuals  for  the  purpose  of  doing  that  business,  it 
is  difficult  to  see  how  the  terms  *  evasion '  and  *  fraud'  can  be  prop- 
erly applied  to  acts  of  our  citizens  whereby  they  obtain  incorpora- 
tion in  another  State.    When  they  come  in  our  State  to  do  business 
they  must  conform  to  our  laws  relating  to  foreign  corporations  and 
comply  with  the  terms  laid  down  by  us  as  conditions  of  allowing 
them  to  transact  business  here.  In  the  case  of  many  kinds  of  cor- 
porations such  conditions  liave  already  been  imposed  by  our  laws, 
and  if  tiiere  be  any  kind  where  none  is  imposed  it  is  conclusive 
evidence  that  up  to  this  time  the  legislature  has  not  thought  it 
conducive  to  the  true  interests  of  the  State  and  its  citizens  to  impose 
them.    I  do  not  intimate  that  it  is  necessary  for  a  State  to  expressly 
by  statute  exclude  foreign  corporations  from  acting  within  its  juris- 
diction.   The  policy  of  the  State  may  exclude  them,  and  that  policy 
may  be  clearly  established  by  a  reference  to  the  general  l^islatioii 
of  a  State.   I  find  none  such,  in  the  laws  of  this  State. 

"It  has  been  urged  that  the  easy  way  which  our  laws  provide  for 
forming  corpora^ons  is  itMlf  a  reason  why  we  should  not  recognize 
as  a  corporation  those  of  our  own  citizens  who  have  gone  to  another 
State  for  the  purpose  of  incorporating  themselves  under  the  laws 
thereof,  to  do  business  in  our  own  State  as  such  corporation. 

"We  think  there  is  very  little  force  in  the  argument.    The  public 
policy  which  we  see  in  our  own  State,  as  evidenced  by  her  laws  upon 
ISS 


CHAP.  VI.]  LBQISLATITB  OONXBOL  OVEtt  FOBEIGN  COBPOBATIONS.  §  128 

the  subject  of  the  formation  of  corporations,  is  one  which  looks  to 
their  ready  and  easy  formation  as  a  means  of  transacting  business 
with  an  accumulation  of  capital  and  an  exemption  from  personal 
liability  to  the  largest  extent  consistent  with  reasonable  supervision 
by  the  State.    The  facilities  for  incorporation  offered  by  this  State 
are  not  the  result  of  any  desire  to  promote  the  formation  of  corpcwar 
tions  here  as  against  their  formation  in  other  States.   They  are 
offered  because  of  a  policy  on  our  part  which  urges  upon  the  Stete 
the  propriety  of  furnishing  them  as  one  means  of  controlling  the 
business  done  by  them  and  keeping  it  within  our  borders.    If  in  any 
particular  case  it  is  thought  by  those  interested  in  the  matter  that 
the  business  can  be  done  in  our  own  State  and  by  our  own  citizens 
with  greater  facility  under  the  form  of  a  foreign  corporation  than 
under  that  of  a  domestic  one,  there  is  no  pubUc  poUcy  which  forbids 
its  transaction  under  such  form.   The  supervision  of  a  foreign  cwr- 
poration  by  this  State  may  easily  be  exercised  by  imposing  terms  as 
Tcondition  of  permitting  it  to  do  business  here.    The  absence  of 
mr  such  terms  in  our  legislation  forms  no  reason  for  refusing  to 
reojgnize  the  corporation.    The  power  rests  with  the  legislature  to 
say  whether  any,  and  if  so  what,  terms  shall  be  imposed  upon  such 
corporations  as  a  ccmdition  of  granting  them  permission  to  do  business 
here.    Those  terms  can  only  be  imposed  by  the  legislature,  and  in 
their  absence  our  courts  ought  not,  merely  on  that  account,  to  refuse 
to  recognize  a  foreign  corporation.   In  the  absence  of  legislaiaon,  our 
courts  must  either  refuse  absolutely,  or  else  they  must  recognize  the 
right  of  such  corporations  to  come  to  this  State  and  do  business  here. 
The  courts  cannot  themselves  impose  terms  or  conditions.  ... 

**The  truth  is,  foreign  corporations  are  not  properly  to  be  regarded 
with  suspicion,  nor  should  unnecessary  restraints  be  imposed  upon 
their  doing  business  in  our  midst.  They  carry  no  black  flag,  and  the 
policy  of  all  civilized  nations  is  to  grant  them  recognition  in  their 
courts.    It  seems  to  me  that  every  reason  which  urges  upon  us  toe 
recognition  of  foreign  corporations  organized  with  power  to  do 
business  in  our  State  and  composed  of  citizens  of  the  foreign  »»te, 
is  equally  potent  when  the  foreign  corporation  is  composed  of  our 
own  citizens.    It  has  always  been  supposed  that  a  State  should^  at 
least  deal  as  liberally  witii  its  own  citizens  as  with  those  of  foreign 
States.   If,  tiierefoie,  we  permit  foreign  citizens  to  come  within  our 
limits  in  the  form  of  a  foreign  corporation  organized  with  power  to 
do  business  here  and  recognized  by  us,  why  should  we  not  permit 
our  own  citizens  to  avail  tiiemselves  of  the  like  privUege  ?  If  we 
impose  terms  and  conditions  upon  foreign  corporations,  »  ww^j 
doing  business  here,  those  same  terms  and  conditions  stiU  and 


§  129  INCOBPOBAUON  AND  OfiGAMIZjlTION  OF  COBPOKATIONS.  [PABTi* 


equally  apply  to  a  foreign  corporation  when  composed  of  our  own 
citizens.  Why  should  they  not  ba  |jaoed  at  least  upon  an  equality 
with  the  foreign  oitizen?"^ 

§  129.  Wbat  otmstitoUa  doing  BnrineM  on  tito  Part  of  a  Foreign. 
Oorpotatlon  witido  the  State.  —  There  is  perhaps  no  subject  of 
corporation  law  wherein  will  be  found  greater  diversity  in  the 
opinions  of  the  courts  of  the  several  Commonwealths  than  that 
relating  to  the  rights  of  foreign  corporations.  The  growth  of 
corporate  organization  as  well  as  the  vast  extension  of  tiie  bnsi- 
nesB  of  corporations  ontnde  <rf  the  State  of  their  origin  has  made 
the  question  of  determining  what  in  legal  effect  constitutes  doing 
business  on  the  part  of  a  foreign  corporation  in  States  other  than 
that  of  its  domicile  one  of  great  practical  importance.  As  has 
already  been  observed,  parties  may  incorporate  in  one  State  at 
the  present  time  for  the  purpose  of  transactii^  their  business  in 
another  Commonwealth.^ 

In  some  of  the  States,  notably  South  Carolina,  the  legislatures 
have  attempted  to  give  a  statutory  definition  as  to  what  constitutes 
doing  business  on  the  pars  of  a  foreign  corporaticm  within  the 
Gommonwealtih.   In  most  of  the  States,  liowever,  the  question  is 
left  for  judicial  determination.   A  fair  example  of  such  statutes 
is  to  be  found  in  the  New  York  statute  3  which  provides  that  no 
foreign  corporation,  other  than  a  moneyed  corporation,  shall  do 
business  in  the  State  without  having  first  procui^"  a  proper 
certiacate  from  the  Secretary  <rf  State  that  It  has  complied  with 
IJie  statutes  in  such  case  made  and  provided.   From  the  foregoing 
it  will  appear  that  the  whole  question  centres  upon  the  meaning 
of  the  word  "  business  "  as  used  in  the  statutes,  of  which  the  fore- 
going is  a  fair  example.    It  will  be  impossible  within  the  limits 
of  this  work  to  discuss  at  mj  length  the  conflicting  decisions  of 
the  courts  <m  the  point  here  referred  to.   All  that  it  is  proposed 
to  do  is  to  present  certain  rules  which  a  careful  reading  of  the 
authorities  have  shown  to  represent  the  prevailing  and  better 
considered  opinions  of  the  various  courts  on  the  queslaoiis  pro- 
sented.   These  rules  jp&y  be  numerated  as  f oUows : 

1  See  also  Lancaster  v.  Amsterdam  484;  28  Atl.  W3;  W^»»n  Goibmbt 

Improvement  Co.,  140  N.  Y.  576 ;  35  N.  E.  23  0.  St.  622. 

'^li  Q..  ,  *  ^^^^  Session  Laws  of  1 890, 

"  State  €x  ra.  v.  Cook  (Ma).  80  8.  W.  chap.  56.3,  see.  150 ;  amended  by  Laws  of 

m;  Oakm  Ufg,  Co.     QtMt,  18  E.  L  1901,  chaps.  96, 538. 
190 


CHAP.  VL]  LEGISLATIVE  CONTROL  OVER  FOREIGN  COBPORATIOire.  §  129 


(1)  In  order  to  constitute  the  transaction  of  business  by  a 
foreign  corporation  within  the  foreign  State,  it  is  not  indispensa- 
ble  that  it  shonld  do  the  greater  part  of  its  business  thereiu.  If 
it  does  anv  part  of  its  ordinary  business  therein  and  the  same 
canuot  properly  be  styled  purely  interstate  commerce,  the  same 
constitutes  the  U^ansaction  of  business  therein  withm  the  meaning 

of  the  statute.^  ,       ^    ,  .... 

(2)  Generally  speaking,  the  making  of  a  single  contract  withm 
the  foreign  State  does  not  constitute  the  transaction  of  busmess 
therein  ^  There  must  be  more  or  less  continuity  in  the  matter, 

(3)  The  institution  and  prosecution  of  actions  not  arismg  out 
of  previous  transactions  had  within  the  foreign  State  does  not 
constitute  the  transaction  of  business  within  the  meanmg  of  the 

**T4)*^Sale8  of  merchandise  by  foreign  trading  corporations  made 
by  means  of  non-resident  travelling  salesmen,  or  by  correspondence 
had  between  the  foreign  corporation  at  the  domiciliary  office  and 
.  customers  in  the  foreign  State,  or  upon  unsolicited  orders  from 
customers  in  the  foreign  State,  do  not  constitute  transaction  of 
business  within  the  meaning  of  the  statute  regulating  the  trans- 
action  of  business  by  foreign  corporations* 

Aside  from  the  question  of  the  nature  of  the  act,  ibiwo  m 
constitutional  grounds  upon  which  it  would  be  held  that  corpora- 
tions  were  not,  under  the  circumstances  here  referred  to,  subject 
to  the  statutes  in  such  foreign  State  compelling  foreign  corpora- 
tions  to  obtain  a  permit  to  do  busmess  therein.   The  constitu- 


1  Lamb  v.  Lamb,  6  Biss.  420;  Fed. 

Cas.  No.  8018. 

«  Cooper  Mfg.  Co.  v.  F«rgaic«,  US 
TJ.  S.  727 ;  Gikhrirt  v.  Helena  H.  S.  &  S.  R. 
Co.,  47  Fed.  593  ;  Colorado  Iron  Works 
Co.' v.  Company,  15  Col.  499;  25  Pac. 
3-25  ;  Commonwealth  v.  Standard  Oil  Co., 
101  Pa.  St.  119 ;  Florsheim  Co.  r.  Lester,  60 
Ark.  120 ;  29  S.  W.  34 ;  MiUer ».  WUliaiM 
(Col.),  59  Pac  740;  IWkwv.  Company, 
11  Coi  419 ;  18  Pac  587  ;  Creteau  v.  Foote 
Co.;  40  Ap.  Div.  (N.  Y.)  215  ;  Sec.  Co.  v. 
Panhandle  Nat.  Bank,  93  Texas,  575  ; 
57  S.  W.  22  ;  Missouri  Coal  Mining  Co. 
v.  Ladd,  160  Mo.  435 ;  61  S.  W.  191 ; 
Pavson  V.  Withers,  5  Biaa.  269 ;  Fed.  Cas. 
No.  10864;  Hope  Mnt  Life  Ins.  Co,  v. 
Fteiiiia,98N.Y.404;  H«ct».LNwn«» 


Co.,  72  Miaa.  109 ;  17  So.  7«9 ;  Kilgore  v. 
Smith,  198  P^8t.48;  15  Atl.  698;  Uaitad 
States  r.  Company,  29  Fed.  17. 

8  Mandel  v.  Company,  154  111.  177; 
40  N.  E.  462 ;  Smith  v.  Little,  67  Ind.  549. 

*  T.  L.  Co.  V.  Holbert,  5  N.  Y.  Ap. 
Div.  559 ;  Novelty  Mfg.  Co.  v.  Connell,  8S 
Hnn,  254 ;  M.  L  W.  C.  &  S.  Co.  v.  Mosher, 
114  Mich.  64;  72  N.  W.  117;  F.  &  J. 
M.  Co.  V.  Foster,  4  Dak.  329 ;  J.  S.  L.  Co. 
V.  Chappell,  184  111.  539 ;  56  N.  E.  539  ; 
Gale  Mfg.  Co.  v.  Finkelstein,  22  Tex. 
Civ.  Ap.  241 ;  54  S.  W.  619 ;  Toledo  Cam- 
mercial  Co. ».  Compwiy,  55  O.  St.  217; 
Wolff  Dryer  Oa  v.  B^,  192  Pa.  St  466  ; 
43  Atl.  1092 ;  Droege  v.  Coi|l|^, 
l!l.Y.466  ;57N.E.  747. 

191  . 


§  129  INCOBPOBATION  AND  OBGANIZITKMI  OF  OOBPORAIKMS. 


tional  grounds  here  referred  to  hare  refer^ee  to  those  trading 
or  quasi-puUic  eorporatioiis  eagaged  wholly  in  interstate  trade 
and  ecmimerce  and  therelore  not  subject  to  regulation  by  State 
enactments.!  The  same  rule  applies  where  the  corporation  is  in 
the  employ  of  the  general  government^ 

(5)  Foreign  corporations  may  take  mortgages  by  way  of  in- 
vestment  or  as  seeority,  or  may  take  real  estate  as  security  or 
otherwise  withoot  eoming  within  the  prohibition  of  the  statute, 
provided  snch  acts  are  not  within  the  express  purposes  for  which 
such  corporations  were  created,  as  for  example  where  they  are  en- 
gaged in  the  mortgage  loan  or  real  estate  business.^ 

(6)  Foreign  corporations  may  take  property  by  devise  in  foi^ 
eign  jurisdictions,  if  their  charter  anthorizes  it,  either  expressly  or 
by  implication,  without  coming  within  the  purview  of  the  statute.* 

(7)  '  The  mere  fact  that  a  corporation  pays  rent  for  offices  for 
Its  agent  employed  to  solicit  orders  in  the  foreign  State  does  not 
in  Itself  prove  that  the  corporation  is  transactmg  bnsmess  within 
the  foreign  State-^  The  qnestion  in  all  such  cases  is  whether  it  is 
actually  transacting  business  within  the  foreign  State,  and  not 
whether  some  incident  preliminary  to  the  transaction  of  such 
busmess  is  to  be  performed  there.^  The  maintenance  of  an  office 
witlim  the  State  may  be  considered  as  a  circamstance  done  in 
connection  with  others  to  show  that  a  foreign  corporation  is 
transacting  business  in  the  State,  but  it  is  by  no  means  conclu- 
sive  of  the  question  J 

(8)  Where  a  foreign  corporation  consigns  goods  to  persons  in 
a  foreign  State  to  sell,  and  sales  are  made  there  by  the  factor  in 
his  own  name  and  the  proeeeds  ooUected  by  him,  this  does  not 

1  Robbiiuiv.  Shelbj  County  Tax  Dis-   L.  E.  1137-  F  B  D  O  fio. «  T.-*..  «a 

^  .'??t^*,r'  120   ^9  S  W  34  *^'-^*" 

ville,  153  U.  S.  289.  a  a        ^    ^^  .  .  ^ 

2  u      o-i      m*.  .     —      —  '^™-»        Christian  Union  v.  Yonnt 

143  U  s'of*^^^"''^^***'  S«ta  Clara  Female  ^11: 

IP  TT  A  r      c  n«  ni.  875;  6  N.E.  183- 

J^  v^o^e  ll'^T^r^^  Lewisburg  Baptist  Univerai^  '^ck^! 

BMflu  foole  12  N  Y.  495;  A.  M.  L.  I.  Co.  31  W.  Va.  621 ;  8  S.  E.  410 ;  ChtmU^ 

CM^Fl^l^'^^'n'V'  r"^^  Cl^-mberlain.  43  N.  Y.  444.  '^'^ 

IM  iL^  ii*.  ^      ^'  o'An^'^oP^"^'  Broom  &  Brush Ca 0.  Addicki 

m 


CHAP.  VI.]  MGKLAmB  CONTROL  OVBB  FOREIGN  CORPORATIONS.  §  129 


constitute  doing  business  within  the  foreign  State  within  the 
meaning  of  the  statute.^ 

(9)  The  renting  of  an  office  in  a  foreign  jurisdiction  in 

charge  of  a  selling  agent  who  distributes  therefrom  samples  to 
customers  and  to  travelling  agents  whose  salaries  are  paid  there- 
from, together  with  the  keeping  of  a  bank  account  in  such  juris- 
diction, does  not  nec^sariljr  constitute  doing  business  within  the 
foreign  State  within  the- meaning  of  the  statute.* 

Finally,  in  addition  to  the  foregoing  rules,  it  may  not  be  without 
value  in  this  connection  to  call  particular  attention  to  a  few  cases 
wliich  seem  to  throw  considerable  light  upon  the  general  subject  of 
what  constitutes  the  transaction  of  business  within  a  foreign  State 
within  the  meaning  of  the  Statutes  already  referred  to.  Attention 
is  first  called  to  the  case  of  People  ex  rel.  Kellogg. Paper  Co.  v. 
Roberts.3  Here  an  Illinois  corporation  furnished  printed  matter 
to  local  publishers  in  the  State  of  New  York.  It  kept  solicitors 
in  the  State  of  New  York  to  secnre  adirertising  patronage  for  a 
newspaper  published  by  it  in  Chicago,  for  this  puqxMe  it  had  an 
office  in  the  State  of  New  York  with  a  manager  and  five  clerks. 
It  also  kept  a  New  York  bank  deposit  from  which  rent  and  sal- 
aries were  paid  amounting  to  an  annual  expense  of  813,000.  It 
had  office  furniture  in  the  State  of  New  York  valued  at  $700.  It 
was  held  that  the  corporation  had  no  capitid  employed  in  the 
State  of  New  York  which  rendered  its  capital  stock  liable  to 
assessment  for  taxation.    The  court  in  its  opinion  stated : 

"  Office  conveniences  are  permitted  here  to  a  foreign  corporation 
doing  business  in  another  State  to  solicit  orders  to  be  executed  in  the 
other  States  without  liability  to  onr  franchise  tax.  In  People  ex  reL 
Smith  Co.  V,  Roberts,*  the  court  held  that  office  leases,  bank  accounts, 
and  the  keeping  of  samples  within  the  State  by  foreign  corporations 
were  nominally  incidental  to  the  business  of  soliciting  orders  and 
making  sales  which  the  relator  could  carry  on  in  the  foreign  State  with- 
out being  liable  to  taxation.  It  also  observed  that  the  maehinerj 
with  whioh  an  interstate  business  is  carried  on  is  to  some  extent 
erected  within  the  State  and  does  not  make  such  business  taxable 
there." 


1  Bertha  Zfne  ft  Mining  Co.  v.  Cbmf 
7  N.  Y.  Misc.  Rep.  128. 

'  Washington  Mills  Co.  v.  Roberts,  8 
N.  Y.  A  p.  Div.  201 ;  aflBrmed  in  151  N.  Y. 
619 ;  People  ex  reL  v,  Roberts,  25  N.  Y. 
18 


Ap.  Dir.  13 ;  People  ex  rd,  9.  BobtlH 

29  N.  Y.  Ap.  Div.  585. 
8  30  N.  Y.  Ap.  Div.^150. 
*  27  N.  Y.  Ap.  Div/455. 

193 


§  129  INCOfiPORAIION  AND  OfiGANiZAIION  OF  COBPOIUTIOHS.  [PABT  t 

In  Yaughan  Machine  Co.  v.  Lighthouse,^  the  testimony  showed 
that  a  foreign  corporation  had  sold  merchandise  iii  New  York 
both  bj  agents  and  hj  correspondence,  and  in  this  case  it  had  no 
office  within  the  State.  Upon  the  question  whether  this  constituted 
the  transaction  of  business  within  the  State,  the  court  spoke  as 
follows: 

**  The  statute  does  not  intend  to  relate  to  business  conducted  in  the 
manner  just  referred  to.  It  contemplates  a  location,  a  domicile, 
having  an  office  and  the  investment  of  some  part  of  its  capital  within 
the  State.  Orders  can  then  be  transmitted  and  dealings  had  with  it 
at  this  office  and  the  conduct  of  its  basiness  is  thus  transferred,  in  a 
measure  at  least,  to^e  headquarters  established  within  the  territorial 
limits  of  this  State.  It  thns  settles  within  the  State,  and  enjoys  the 
benefits  incident  to  a  domestic  corporation,  and  the  legislature  im- 
poses requirements  and  obligations  upon  it  by  reason  of  the  privi- 
lege conferred  of  doing  business  like  a  body  corporate  organized  in 
this  State.  It  was  never  intended  to  hamper  trade  and  restrict 
interstate  commerce  by  bringing  within  its  ban  eyery  corporation 
which  happens  to  cross  the  State  boundary  with  its  wares  to  supply 
customers  who  have  ordered  tiiem  from  the  home  office. 

^  ...  It  mnrtbekept  in  mind  that  itwa^  not  designed  to  fetter  or 
exclude  business  from  the  State.  Its  aim  was  to  require  a  foreign 
corporation,  which  was  on  a  level  in  its  privileges  with  one  organ- 
ized here,  to  bear  the  burdens  and  be  equally  accessible  to  process 
with  State  corporations.  To  give  it  the  construction  contended  for 
by  the  defendant  would  interfere  with  that  comity  between  the  States 
in  their  trade  relations  which  has  been  potential  in  the  dCYelopment 
of  oar  commercial  and  indostrial  bnsiness." 

i 

In  Gunanier  Lumb^  Company  9.  Insaranee  Oompany,^  the  eonrt 
spoke  as  follows : 

"  This  statute  —  relative  to  foreign  corporations  obtaining  a  permit 
to  do  business  in  this  State — was  simply  declaratory  of  the  policy  of 
tiie  State  that  foreign  stock  corporations  should  not  carry  on  any  busi- 
ness in  this  State  which  similar  corporations  organized  under  its  laws 
could  not  lawfully  conduct.  Its  purpose  was  not  to  avoid  contracts, 
but  to  provide  an  effective  supervision  and  control  of  the  business 
proposed  to  be  carried  on  here  by  foreign  corporations,  and  it  is 
absurd  to  contend  that  it  had  no  reference  to  the  facts  established  by 
the  evidence  in  the  case  at  bar." 


1  04  N.  T.  All.  Dir.  13S. 

194 


«  67  N.  Y.  Ap.  Div.  151. 


CBAP.  TI.]  LEOISLATfYE  GONTBOL  OYIB  FOBlfON  COBPOBAflOKS.  §  ISO 

Again,  the  conrt  said : 

^The  scope  of  the  laW  here  under  consideration  is  that  of  merely 
undertaking  to  regulate  the  business  of  foreign  corporations  so  that 
they  shall  not  do  business  under  more  advantageous  terms  than  those 

allowed  to  corporations  of  this  State.    It  has  no  relation  whatever  to 

the  incidental  contracts  of  a  foreign  corporation  made  with  a  domestic 
corporation,  such  as  the  insurance  of  the  property  of  a  lumber  com- 
pany organized  under  the  laws  of  Florida  and  doing  business  in  that 
State." 

Finally,  attention  is  called  to  People  ex  rel.  Dives  Pelican  Com- 
pany V.  Feitner.^  In  this  case  a  corporation  organized  under  the 
laws  of  the  State  of  Colorado  had  its  principal  place  of  basiness 
in  the  State  of  New  York  and  had  an  office  in  the  City  of  New 

York.  The  New  York  office  was  maintained  for  the  sole  purpose 
of  enabling  the  directors  of  the  corporation  to  meet  in  it  and 
declare  dividends  on  its  stock.  No  goods  of  the  corporation  were 
sent  to  w  sold  in  New  York.  It  had  no  bills  receivable  in  New 
York,  and  the  only  assets  which  it  had  in  that  State  were  office 
furniture  and  money  on  hand  and  in  bank  which  had  been  sent 
from  its  principal  office  to  its  New  York  office  for  the  purpose 
of  paying  dividends.  It  was  held  that  the  corporation  was  not 
doing  business  in  the  State  of  New  York  within  the  meaning  of 
the  statute. 

§  180.  Penalty  for  transacting  Business  in  a  Foreign  State' 
without  obtaining  a  Permit.  —  The  statutes  of  the  various  States 
differ  materially  with  respect  to  the  penalty  that  attaches  to  the 
transaction  of  business  by  a  foreign  corporation  without  having 
first  complied  with  the  statute  relatiFe  to  obtaining  a  permit  to 
transact  the  same.  The  form  of  penalty  prescribed  usually  takes 
one  of  five  forms,  to  wit : 

(1)  Suspending  the  right  to  maintain  suits  in  the  courts  of  the 
foreign  State  until  the  statute  has  been  complied  with.  (2)  Stat- 
utes absolutely  prohibiting  the  right  to  bring  suit  on  contracts 
entered  into  in  the  foreign  State  before  the  ootaining  of  a  permit 
to  do  business  therein.  (3)  Statutes  providing  that  all  contracts 
made  by  a  foreign  corporation  before  obtaining  a  permit  to  do 
business  in  a  foreign  State  shall  be  absolutely  void.  (4)  Statutes 
providing  penalties  in  certain  designated  amount  for  failure  to 

»  77  N.  Y.  Ap.  Div.  189. 

195 


I 


§  130  INCOBPOfiAHON  AND  ORGANIZATION  OF  COBPOBATIONS.  [PABT  I. 

obtain  a  permit  in  a  foreign  State  before  transacting  business 
therein.  (5)  Statutes  merelj  giving  the  right  to  the  State  to 
bring  proceedings  to  oust  or  exclude  foreign  corporations  from 
doing  business  ir^hin  the  foreign  State  without  having  first 
obtained  a  permit  so  to  do.  Each  of  the  foregoing  will  now  be 
taken  up  briefly  for  separate  consideration. 

(1)  Smpending  the  right  to  maintain  suits  in  the  courts  of  the 
foreign  State  until  the  siatuU  hoe  been  eon^Ued  tratA*  Such  stat- 
utes do  not  affect  tiie  Tsliditjr  of  ccmtracts  previously  made  in  the 
foreign  State  by  a  foreign  corporation,  but"  merely  prevent  it 
from  enforcing  the  same  therein  until  it  has  obtained  a  permit  to 
do  business  in  such  State.^ 

^2)  StatiUes  absolutely  prohibiting  the  right  to  bring  suit  on 
eemtraeU  entered  into  m  the  foreign  State  before  the  obtaimngof 
a  permit  to  do  hueinem  therein.  Satk  statutes  exist  in  New  YoA 
and  read  as  follows : 

"  No  foreign  corporation  now  doing  business  in  this  State  shall  do 
business  herein  after  December  31st,  1892,  without  having  procured 
such  certificate  from  the  Secretary  of  State  ;  but  any  contract 
previously  made  by  the  ecurporation  may  be  permitted  and  enforced 
within  the  State  suhsequ^t  to  such  date.  No  foreign  stock  oorpoia- 
tion  doing  business  in  this  State  shall  maintain  any  action  in  this 
Stale  upon  any  contract  made  by  it  in  this  State  unless  prior  to  the 
making  of  snch  contract  it  shall  have  procured  a  certificate." 

In  interpreting  this  provision  of  the  statutes  the  Supreme 
Court,  in  Dunbarton  Flax  Spinning  Co.  v.  Greenwich  and  John- 
sonville  Railway  Company,^  spoke  as  follows : 

Unless  prohibited  by  law,  a  foreign  corporation,  duly  organized, 
can  come  into  this  State  and  exercise  the  legitimate  powers  conferred 
upon  it  and  carry  on  any  bunness  not  prohibited  by  bur, laws  or 
against  public  policy.  The  State  has  the  power,  however,  to  compel 
compliance  with  its  laws  or  to  punish  the  corporation  if  it  does  not 
do  so.  And  the  legislature  can  deny  to  such  corporation  failing  to 
comply  with  its  laws  by  procuring  a  certificate  and  paying  the  license 
fee,  all  recourse  to  its  courts  to  enforce  its  rights  or  to  redress  its 
wrongs.  These  statutes  are,  however,  mere  revenue  regulations, 

1  Goddard  v.  Crefields  Mills,  75  Fed.  v.  Fowler  Bios.,  163  N.  Y.  680  ;  57  N.  E. 
818 ;  21  C.  C.  A.  530 ;  Davis  Frovision  Co.   1 108. 

s  S7  Ap.  IMy.(N.  Y.)  SU 

196 


OTAP.  VI.]  LEGISLATIVE  CONTROL  OVEE  FOREIGN  CORPORATIONS.  §  ISO' 

compliance  with  which  is  made  necessary  in  order  to  acquire  the 
right  to  do  business  here  and  to  enforce  causes  of  action  m  our 

Lsncaster  v.  A.  I.  Co.^  it  is  said  to  be  the  policy  of  the  State 
to  encourage  foreign  corporations  to  enter  its  boundaries  for  the 
transaction  of  Uwful  business,  and  it  is  manifestly  for  the  interest 
of  the  State  that  foreign  capital  should  be  actively  employed  withm 
its  borders." 

(3)  Statutes  providing  that  aU,  eontraeti  made  bjf  a  foreign  eor- 
poration  before  obtaining  a  permit  to  do  business  in  a  foreign  8t^ 
shall  be  absoluUly  void.  To  have  the  effect  stated  above  the 
statute  must  in  express  terms  declare  that  contracts  made  by  cor- 
porations which  have  not  Complied  with  the  statute  relative  to 
obtaininir  a  permit  to  do  business  within  a  foreign  State,  shall  be 
absolutely  void.  Where  such  is  the  case,  it  is  entirely  dear  that 
no  action  can  be  maintained  by  the  corporation  thereon  in  sueh 
foreign  State.^  Such  statutes,  however,  have  no  extra-territorial 
^ect 

In  an  Illinois  case  » the  court  spoke  ^  follows : 

«To  permit  the  company,  when  they  admit  that  they  have  dis- 
regarded all  these  requirements,  to  recover,  would  be  for  the  courts 
to  disregard  the  clearly  expressed  will  of  the  general  assembly,  and 
to  say  what  it  has  said  shaU  be  unlawful  is  and  shaU  be  lawful  and 
binding.   To  enforce  the  payment  of  this  note  would  he,  virtuallyy 
to  repeal  a  plain  enactment  of  the  legislatuie.   When  the  legidatme 
prohibits  an  act,  or  declares  that  it  shall  be  unlawful  to  perform  i^ 
every  rule  of  interpretation  must  say  that  the  legislature  intended 
to  interpose  its  power  to  prevent  the  act,  and,  as  one  of  the  means 
of  its  prevention,  that  the  court  shall  hold  it  void.    This  is  as  mani- 
fest as  if  the  statute  had  declared  that  it  should  be  void.   To  hold 
otherwise  would  be  to  give  the  person,  or  corporation,  or  individual 
the  same  rights  in  enforcing  prohibited  contracts  as  the  good  citizen 
who  respects  and  conforms  to  the  law.    To  permit  such  contracte  to 
be  enforced,  if  not  offering  a  premium  to  violate  law,  certainly 
withdraws  a  large  portion  of  the  fear  that  deters  men  from  defying 
the  law.    To  do  so  places  the  person  who  violates  the  law  on  an  equal 
footing  with  those  who  strictly  observe  its  requirements.    That  this 
contract  is  absolutely  void,  as  to  appellee,  we  entertain  no  doubt."* 

1  HON  Y.576.591  ;  35  N.  E.  964.  «  C.M.H.A.Co.r.Ro«mftrf,55m.8S. 

2  Bank  of  LouisviUe  i;.  Young,  37  Mo.      *  See  also  McCmb*  4  FUMr  Ca  «. 

.08  CoBpwiy,  74  Fed.  6S7. 

898.  ^jjy 


§  181  INCORPORATION  AND  ORGANIZATION  OF  C0BP0MTI0N8,  LPABT  I; 

(4)  Statutes  providing  'penalties  in  certain  designated  anumnit 
for  failure  to  obtain  a  permit  in  afifrmgn  State  b^ore  tramaeting 
bunrnes  therein.  In  tiiis  coniiectioii  two  opposing  lines  of  author- 
ity are  to  be  met  with,  one  holding  that  where  a  penalty  is 
imposed,  this  is  exclusive,  but  does  not  render  the  contract  made 
by  the  foreign  corporation,  out  of  which  tlie  imposition  of  tlie 
penalty  arose,  invalid,  i  The  other,  and  what  appears  to  ns  the 
better,  view  is  that  although  a  specific  penalty  is  provided,  this  in 
Itself  operates  to  render  ^  cwitract,  out  of  which  the  imposition 
of  the  penalty  arose,  illegal  and  unenforceable  in  the  courts  of 
such  foreign  State .2 

(5)  Statutes  merely  giving  the  right  to  the  State  to  bring  pnh 
eeedings  to  oust  or  exclude  foreign  eorporatdone  from  doing  bimnese 
mtkin  the  foreign  State  wiOaut  hamng  first  (Stained  a  permit  so 
to  do.  Unless  some  other  remedy  is  prescribed  by  statute,  the 
proper  remedy,  in  case  foreign  corporations  engage  unlawfully  in 
business  in  a  foreign  State,  is  for  the  State  to  bring  quo  warranto 
proceedings  to  oust  or  exclude  such  foreign  corporation  from 
doing  busmess  withm  the  foreign  jurisdidti<in.»  In  such  proceed- 
ings ibe  courts  have  the  right  to  review,  if  they  see  fit,  the  action 
of  the  Secretary  of  State  in  issuing  a  permit  to  such  foreign 
corporation  to  do  business  within  the  State.* 

§  131.  License  Tax  on  Forrtgn  Kk^rpmokmm.^  There  is  a  dear 
distinction  to  be  observed  of  course  between  the  creation  of  a  cor- 
poratioii  under  State  authority  and  the  licensing  of  a  corporation 
rfreadj  existing,  to  do  business  within  the  jurisdiction  of  such 
State*  Sometimes  the  statute  provides  that  after  foreign  cor- 
porations  have  complied  with  certain  formalities  relative  to  obtain- 
ing a  permit  to  do  business  within  a  foreign  State,  they  shall 
thereby  ipeofaeto  become  domestic  corporations.  Under  such  a 
statute  it  has  been  held  that  they  thereby  become  for  all  pur- 
poses, except  for  such  matters  as  pertain  to  federal  affairs 
domestic  corporations  and  not  mere  licensed  corporations*  It 

rett  Fortcn         ''''''' Gar-  517 ;  60  N.  W.  ISl ;  Stele    Companv,  39 

rett  Ford  Co.  v.  Company,  20  R.  L  189;  Minn.  538;  41  N.  W  108. 

^'  ^'^J-  ^  V-„^i"hoit,  84  Fed.  514.         *  State Comp^y,^9  O.  St  440  •  31 

«  M^yv.  Comer,  87  Ala.  431 ;  16  So.  N.  E.  658 ;  State  I. 

a04;  CM.  H.  A.  Co.  9.  Rownthal,  55  111.  517;  60  N  W  121 

85;Stater.Briggi,lieiBd.»;18N.B.       »  C.B.'&Q  Ry*Co     Harri«  iQWoii 

395;  Buxton  v.  Hamblen.  32  Me.  448;  ^  g^^' *  ^'^  ^'^^  12  Wall. 

Stewart  v.  Company,  38  N.  J.  Law,  436.  •  Debnam  9.  GMniMDv  Ifift  If  O  a»i . 

8  State  V.  Company,  47  O.  St.  167  ;  24  36  &  fi.  iST                           C  881 ; 
N.  £.  392 ;  State  v.  ComjfUkj,  91  Iowa» 
1.98 


CHAP.  VI.]  LWJISLITITB  OONXBOL  OVEE  FOREIGN  C0BP0EATI0N8.  §  132 


has  been  repeatedly  held  by  the  United  States  Supreme  Court 
that  State  legislatures  may  impose  license  taxes  to  any  amount 
upon  foreign  corporations  as  a  condition  to  the  grantang  of  the 
tIu  of  such  foreign  corporations  to  transact  banness  la  a 

foreign  State.^  ,  if 

In  addition  to  the  payment  of  a  tax,  there  are  a  number  of 
other  requiremente  in  force  in  the  various  States  differing  one 
from  the  other,  such,  for  example,  as  requiring  the  fihng  of  a  copy 
of  the  articles  of  incorporation,  appointing  an  agent  witbm  0»e 
State  to  accept  and  receive  service  of  process,  etc.  Such  require- 
ments  if  reasonable  ate  valid.* 

The  State  may,  if  it  choose,  tax  without  restriction  as  to  amount 
or  entirely  prohibit  a  foreign  corporation  from  doing  busmess 
within  tlie  State,  provided,  however,  it  is  not  engaged  m  mtewtate 
commerce  or  is  in  the  employ  of  the  general  government."  Some 
States,  snch  for  example  as  Ohio,  New  Jersey,  and  Nevada,  adopt 
what  are  known  as  retaliatory  statutes.  The  purpose  of  such 
statutes  is  to  place  foreign  corporations  which  do  business  m  for- 
eign States  under  the  same  regulations  as  are  impofwd  by  the 
domiciliary  State  upon  foreign  corporations  seeking  to  do  busmess 

witiiin  such  State.*  , 

The  power  of  a  State  to  exclude  foreign  corporations  from 
transacting  business  within  its  borders  cannot  be  questioned, 

neither  can  its  motives  in  so  doing.* 

Thirty-three  of  tlie  States  liave  imposed  the  payment  of  lioeme 
taxes  upon  foreign  corporations  desiring  to  do  business  witiuB  the 

foreign  Stote.*  . 

§  132.  Annual  UoaaM  «Mc  on  Foreign  CoiporalfaMW.  —  ine  rigni 
of  a  State  to  impose  an  annnal  license  tax  on  foreign  corporations 

transacting  business  witliin  its  borders  is  unequivocally  estab- 
lished by  the  decision  of  the  Supreme  Court  of  the  United  States 

1  Paol ...  Virginia,  8  Wall.  168 ;  P.  C.  «  Horn  SOrer  Mining  Co.  v.TS.  T..  I4S 
S  M  &  N  Co  iT  Pennsylvania,  125  V.S.   H.  8.  805;  Pteree  ».  P«<»|*>,  106  III.  II  , 

10  WdJ.  5T«riN«»bi«aali|ir*»M-       *  State      Rf  """""d,  «  O  &t.  214 

1     •    125  U  S  184  13N.  K.30;  Miles  ».  Woodward,  115  Cal. 

Hlaftman      Company,  13  Tex.  Civ.  308 ;  46  I'ac.  "076 ;  State  v.  Company,  39 

Ap.  169  ;  36  S,  W.  306  ;  E.  &  S.  A.  M.  &  I.  Minn^538  i  *l      W.  108. 

Co.      Hardy,  93  Texas,  289  ;  55  S.  W.  ^  *  D^I*      C«mp«y.  M  V.  S.  535. 

169 :  Utley  ...  Company,  4  Col.  869 ;  Green  Hartford  Fi«  InSj_^Co  r.  Vtfmmi.  T 

t  Aviation,  105  Ioirm,6S8;  15  N.W.  Mich.  485  ;  38  N.  W.  474. 

199 


§132  INCOBPOBATION  AND  OBaANIZATION  OF  COftPOIUTIONS.  [P^J. 

in  Horn  Silver  Mining  Co.  v.  State  of  New  York.^  Upon  the  sub- 
ject just  referred  to,  that  court  s|x>ke  as  foiioirs: 

"  The  right  and  imyil^  or  the  feanehise,  as  it  may  be  termed, 
of  being  a  emrporation,  is  of  great  Talne  to  its  members,  and  is  con- 
sidered as  property,  separate  and  distinct  from  the  property  which 
the  corporation  itself  may  acquire.    According  to  the  law  of  most 
States  this  franchise  or  privilege  of  being  a  corporation  is  deemed 
personal  property  and  is  subject  to  separate  taxation.    The  right  of 
the  States  to  thus  tax  it  has  been  recognized  by  this  court  and  the 
State  courts  in  instances  without  number^   It  was  said,  in  Delaware 
Railroad  Tax,^  that  *  the  State  may  impose  taxes  upon  the  corporation 
as  an  entity  existing  under  its  laws,  as  weU  as  upon  the  capital  stock 
of  the  eorporatiou  m  its  sepoiate  corporate  property.   And  the 
manner  in  which  its  yalue  shall  be  assessed,  and  the  rate  of  taxation, 
howeyer  arbitrary  or  capricious,  are  mere  matters  of  legislative  dis- 
cretion,' except,  we  may  add,  as  tliat  discretion  is  controlled  by  the 
Organic  Law  of  the  State.    And,  as  we  there  said  also,  4t  is 
not  for  us  to  suggest  in  any  case  that  a  more  equitable  mode  of 
assessment  or  rate  of  taxation  might  be  adopted  than  the  one  pre. 
scribed  by  the  Legislature  of  the  State;  our  only  concm  is  with 
the  validity  ol  the  tsz;  all  else  lies  beyond  the  domain  of  our 
jurisdiction/ 

^"The  granting  of  the  rights  and  privileges  which  constitute  the 
franchises  of  a  corporation  being  a  matter  resting  entirely  within  the 
control  of  the  legislature,  to  be  exercised  in  its  good  pleasure,  it  may 
be  accompanied  with  any  such  conditions  as  the  legislature  may 
deem  most  suitable  to  the  public  interests  and  policy.    It  may  impose 
as  a  condition  of  the  grant,  as  well  as,  also,  of  its  ecmtinued  exercise, 
the  payment  of  a  specific  sum  to  the  State  eaeh  year,  <»  a  portion  of 
the  profits  or  gross  receipts  of  the  oorporation,  and  may  prescribe 
such^mode  in  which  the  sum  shaU  be  ascertained  as  may  be  deemed 
convenient  and  just  There  is  no  constitutional  inhibition  against 
the  legislature  adopting  any  mode  to  arrive  at  the  sum  which  it  will 
exact  as  a  condition  of  the  creation  of  the  corporation  or  of  its  con- 
tinned  existence.    There  can  be,  therefore,  no  possible  objection  to 
the  validity  of  the  tax  prescribed  by  the  statute  of  New  York,  as  far 
as  it  relates  to  its  own  corporations.   Nor  can  there  be  any  greater 
objection  to  a  similar  tax  upon  a  foreign  corporation  ^g  business 
by  its  permission  within  the  State.   As  to  a  fordgn  corporation  — 
and  aU  oorpotatiwis  in  States  otiier  ^  the  State  of  its  creation  are 


1  143  U.  S.  305. 


«  SS  U.  8.  (1«  Wan.)  206. 


OHAP.TI.]  LBOIK-ATITB  CONTROL  OVBB  FOREIGN  COBPOBATIONS.  §  132 

deemed  to  be  foreign  corporations — it  can  claim  a  right  to  do  business 
in  another  State  to  any  extent,  only  subject  to  the  conditions  imposed 

by  liie  laws.  _i.  ^.v  4.  x. 

**  This  doctrine  has  been  so  frequently  declared  by  this  court  that  it 
must  be  deemed  no  longer  a  matter  of  discussion,  if  any  question  can 
ever  be  considered  at  rest.  ^  ^ 

"Only  two  exceptions  or  qualifications  have  been  attached  to  it  in 
all  the  numerous  adjudications  in  which  the  subject  has  been  eon- 
sidered,  since  the  judgment  of  this  court  was  announced  more  than 
half  a  century  ago  in  Bank  of  Agusta  v,  Earle.^  One  of  these 
qualifications  is  that  the  State  cannot  exclude  from  its  limits  a 
corporation  engaged  in  interstate  or  foreign  commerce,  established 
by  the  decision  in  Pensacola  Teleg.  Co.  v.  Western  U.  Teleg.  Go.^ 
The  other  limitation  upon  the  power  of  -the  State  is,  where  the 
corporation  is  in  the  employ  of  the  general  government,  an  obvious 
exception,  first  stated  we  think  by  the  late  Mr.  Justice  Bradley  m 
Stockton  V.  Baltimore  &  N.  Y.  E.  Co.»  As  that  learned  justice  said, 
<  If  Congress  should  employ  a  corporation  of  ship-builders  to  con- 
Steuct  a  man  of  war,  they  should  have  the  right  to  purchase  the 
necessary  timber  and  iron  in  any  State  in  the* Union.'  And  this 
court,  in  citing  this  passi^,  added,  '  without  the  permission  and 
against  the  prohibition  of  the  State.*  * 

"Having  the  absolute  power  of  excluding  the  foreign  corporation, 
the  State  may,  of  course,  impose  such  conditions  upon  permitting  the 
corporation  to  do  business  within  its  limits  as  it  may  judge  expedi- 
ent; and  it  may  make  the  grant  or  privilege  dependent  upon  the 
payment  of  a  specific  license  tax,  or  a  sum  proportioned  to  the  amount 
of  its  capital.  No  individual  member  of  the  corporation  or  the  cor- 
poration  itself  can  call  in  question  the  validity  of  any  exaction  which 
the  State  may  require  for  the  grant  of  its  privileges.  It  does  not 
lie  in  any  foreign  corporation  to  complain  that  it  is  subjected  to  the 
same  law  with  the  domestic  corporation.  The  counsel  for  the  ap- 
pellant  objects  that  the  statute  of  New  York  is  to  be  trealed  as  a 
tax  law,  and  not  as  a  license  to  the  corporation  for  permission  to  do 
business  in  the  State.  Conceding  such  to  be  the  case,  we  do  not 
perceive  how  it  in  any  respect  affects  the  validity  of  the  tax.  How- 
ever  it  may  be  regarded,  it  is  the  condition  upon  which  a  foreign  cor- 
poration  ^n  do  business  in  the  State,  and  in  doing  such  business 
it  puts  itself  under  the  law  of  the  State,  however  that  may  be 
eharacterized." 

1  13  Peters  (U.  S.),  519.  *  Pembina  Con  S.  Min.  &  Mill  Co. 

2  96  U.  S.  1 .  Ptemsylvania,  185  U.  S.  181. 

8  32  Fed.  Rep.  9. 

201 


§  188  INCOBPOBAHON  AND  omAimjauas  w  oospimATioss.  [PARTh 

From  the  foregoing  opinion  it  is  clear  that  it  is  nnqnestionablj 
within  the  power  of  the  Tarioos  State  legislatares  to  impose  an 
annual  license  tax  upon  foreign  corporations  transacting  business 
within  their  limit.  However,  but  few  of  the  States  have  chosen  thus 
far  to  exercise  this  power.  Alabama,  Colorado,  Massachusetts, 
New  York,  Oliio,  Oregon,  Texas,  Vermont,  Virginia,  Washington, 
and  West  Virginia  are  the  onlj  States  wHieh  impose  an  annual 
license  tax  upon  foreign  corporations.  In  each  of  these  States  the 
tax  is  a  graduated  one,  the  amount  thereof  depending  either  upon 
the  authorized  capitalization  of  the  corporation,  or  the  amount  of 
the  capital  stock  represented  by  capital  invested  in  the  foreign 
State  where  such  annoal  license  tax  is  imposed* 

§  laa.  To  what  Bst0iit  is  Hub  Taxing  Power  oi  the  State  with 
Reference  to  Domestic  and  Foreign  Corporations  Engaged  in  Inter- 
state Commerce  Limited  by  the  "  Commerce  Clause  "  of  the  Federal 

Constitution?  —  The  question  as  to  the  extent  of  the  legislative 
power  of  the  various  State  legislatures  with  reference  to  taxing 
domestic  and  foreign  corporations  must  always  be  arrived  at  by 
giving  due  consideration  to  the  limitations  imposed  upon  this 
power  by  the  provisions  of  what  is  known  as  the  ''Interstate 
Commerce  Clause  of  the  Federal  Constitution."  i 

Again,  this  question,  in  order  to  permit  of  intelligent  consider- 
ation, mnst  be  viewed  from  four  standpoints,  to  wit:  (1)  What 
effect,  if  any,  has  the  Interstate  Commerce  Clause  of  the  Fed- 
eral Constitution  upon  the  right  of  the  several  States  to  impose 
organization  taxes  upon  corporations  engaged  in  interstate  com- 
merce ?  (2)  What  effect,  if  any,  has  the  Interstate  Commerce 
Clause  of  the  Federal  Constitution  upon  the  right  of  the  several 
States  to  impose  franchise  taxes  upon  corporations  engaged  in 
interstate  commerce?  (3)  What  effect,  if  any,  has  the  Interstate 
Commerce  Clause  of  the  Federal  Constitution  upon  the  right  of 
the  several  States  to  impose  license  taxes  upon  corporations 
engaged  in  interstate  commerce  ?  (4)  What  effect,  if  any,  has  the 
Interstate  Commerce  Clause  of  the  Federal  Constitution  upon  the 
ri^ht  of  the  several  States  to  impose  property  taxes  upon  corpora- 
tions engaged  in  interstate  commerce?  Each  of  these  will  now 
be  taken  up  for  separate  consideration. 

(1)  What  effect,  if  any,  has  tlie  Interstate  Commerce  Clause 
of  the  Federal  ConstitatitHi  upon  the  right  of  the  several  States 

1  See  Constitution  of  the  United  States,  Art.  I.  sec.  8,  clause  3. 
202 


€HAP.  VI.J  LBGISLATIVB  COHTBOL  OVBB  FOREIGN  COBPORATIONS,  §  138 

to  impose  organization  taxes  upon  corporations  engaged  in  inter- 
state commerce  ?  The  State  is  said  to  possess  inherent  power  to 
tax  its  corporations.  So  the  State  has  undoubted -power  to  exact 
a  bonus  for  the  granting  of  a  franchise,  payable  in  advance  or  in 
futuro}  A  round  sum  or  an  annual  charge,  with  or  without  ref- 
erence to  capital  stock,  may  be  asked  by  the  legislature  for  such 
a  franchise.*  In  discussing  tlie  question  of  the  right  of  a  State  to 
impose  a  fee,  a  license  or  a  tax  upon  corporations,  the  Supreme 
Court  of  the  United  States  in  Ashley  v,  Ryan,»  spoke  as  follows : 

At  the  time  the  articles  were  presented  for  filing,  the  statute 

law  of  the  State  charged  the  parties  with  notice  that  the  benefits 
which  it  was  sought  to  procure  could  not  be  obtained  without  pay- 
ment of  the  tax  for  consolidation  which  the  Secretary  of  State 
exacted.   As  it  was  within  the  discretion  of  the  State  to  withhold  or 
grant  tiie  privilege  of  exercising  corporate  existence,  it  was  as  a  neces- 
sary ^sultant  also  within  its  power  to  impose  whatever  conditions 
it  might  deem  fit  as  prerequisite  to  corporate  life.   The  act  of  filing, 
constituting,  as  it  did,  a  claim  of  a  right  to  the  franchise  granted  by 
the  State  law,  carried  with  it  a  voluntary  assumption  of  any  bur. 
den  with  which  the  privilege  was  accompanied,  and  without  which 
the  right  of  corporate  existence  could  not  have  been  procured. 
Having  thus  accepted  the  act  of  grace  of  the  State  and  taken  the 
/  advantages  which  sprang  from  it,  the  corporation  cannot  be  per- 
ndtted  to  hold  on  to  the  privilege  or  right  granted  and  at  the  same 
time  repudiate  the  condition  by  tiie  performance  of  which  it  could 
alone  obtain  the  privilege  which  it  sought.  That  the  right  to  be  a 
State  corporation  depends  solely  upon  the  grace  of  the  State  and  is 
not  a  right  inherent  in  the  parties,  is  settled. 

"...  It  follows  from  these  principles  that  a  State  in  granting  a 
corporate  privilege  to  its  own  citizens,  or,  what  is  equivalent  thereto, 
in  permitting  a  foreign  corporation  to  become  one  of  the  constituent 
elements  of  a  consolidated  corporation  organized  under  its  laws,  may 
impose  such  conditions  as  it  -deems  proper,  and  that  the  acceptance 
of  the  franchise  in  either  case  implies  a  submission  to  the  conditions 
without  which  the  franchise  could  not  haye  been  obtained." 

The  right  of  the  State  to  impose  such  taxes  upon  the  organiza- 
tion of  a  corporation  is  in  no  wise  affected  by  the  Interstate  Com- 
merce Clause  of  the  Federal  Constitution ;  this,  too,  even  when 

1  B.  &  0.  B.  B.  Co.  V.  Maiylsiid,  SB  2  Gordon  ».  Appeia  Tax  Courl^S  Horn 
U.8.45S.  (U.S.)  134. 

8  153  U.  S.  436 

203 


§  138  INCOBPOBATION  AND  ORGANIZATION  OF  COBPOBATIONS.  [PABT  L 

the  corporation  is  formed  for  the  express  purpose  of  engaging  in 
interstate  commerce.  In  the  words  of  the  United  States  Supreme 
Court,  ^  the  right  and  privilege  of  being  a  corporation  is  of  great 
Talne  to  its  members,  as  it  is  considered  as  property  separate  and 
distinct  from  the  property  which  the  corporation  may  acquire. 
According  to  tlie  law  of  most  States  tliis  franchise,  or  privilege  of 
being  a  corporation,  is  deemed  personal  property  and  is  subject  to 
separate  taxation.  The  right  of  the  State  to  thus  tax  it  has  been 
reei^ized  by  tiiis  court  and  the  State  ooorts  in  instances  without 
number."  * 

(2)  What  effect,  if  any,  has  the  Interstate  Commerce  Clause 
of  the  Federal  Constitution  upon  the  right  of  the  several  States 
to  impose  franchise  taxes  i^n  corporations  engaged  in  interstate 
commerce?  Again,  atten^on  is  here  called  to  t^e  decisions  of 
the  United  States  Supreme  Court  relative  to  the  exercise  of  the 
power  in  question.  The  granting  of  the  rights  and  privileges," 
observes  that  tribunal,  "  which  constitute  the  franchises  of  a  cor- 
poration, being  a  matter  i*esting  entirely  within  the  ccmtrol  of  the 
legislature,  to  be  exercised  in  its  good  pleasure,  it 
panied  with  any  sndi  conditioiis  as  the  legislatnre  may  deem  most 
suitable  to  the  public  interests  and  policy.  It  may  impose  as  a 
condition  of  the  grant  as  well  as  also  of  its  continued  exercise, 
the  payment  of  a  specific  sum  to  the  State  each  year,  or  a  portion 
of  the  profits  or  gross  receipts  ot  the  corporation,  and  maj  pre- 
scribe sach  mode  in  which  the  Bum  diall  he  ascertained  as  may 
be  deemed  conTenient  and  just.  There  is  no  constitutional  inhi- 
bition against  the  legislature  adopting  any  mode  to  arrive  at  the 
sum  which  it  will  exact  as  a  condition  of  tiie  creation  of  the 
corporation  or  of  its  continued  existence.  There  can  be,  there- 
fore, no  possible  objection  to  the  validity  of  the  tax  prescribed 
by  the  statotea  of  any  State  so  far  as  it  relates  to  its  own  corpora- 
tions, nor  can  there  be  any  greater  objection  to  a  similar  tax 
upon  a  foreign  corporation  doing  business  by  its  permission 
within  the  State.  As  to  a  foreign  corporation,  it  can  claim  a 
right  to  do  borineas  in  another  State  to  any  extmt  only  sabject  to 
the  conditions  imposed  by  its  statutes.  Only  two  exceptions  or 
qualifications  have  been  attached  to  the  foregoing,  to  wit :  One  is 
that  the  State  cannot  exclude  from  its  limits  a  corporation  en- 

>  H<mSangtMiBiBgCi>.».II«irTaik,  YoA,  134  IT.  8.  5N;  Dalnran  B.  B. 
IM  v.  8.  305;  HoM  bi.CSa.fi.  Bnr  Tmx,  86  U.  a  MS. 

204 


CHAP.  VI.]  LiaiSLATITK  OOHTBOL  OTHl  FOBHSH  COBPOBATIONS.  §  133 

gaged  in  interstate  or  foreign  commerw.  The  other  limitation  is 
St  where  the  corporation  is  in  ti.o  employ  of  tiie  goyernment. 
Having  the  absolute  power  to  exclude  the  foreign  corpora  ion  the 
State  may  of  course  impose  such  conditions  upon  permittmg  the 
corporation  to  do  business  within  its  limits  as  it  may  judge  expe- 
.  dient ;  and  it  may  make  the  grint  or  privilege  deP^.-^den*  "P^" 
the  payment  of  a  specific  license  tax  or  a  sum  proportioned  to  the 
„nount  of  its  capital.  No  individual  member  of  tin,  eorpomtion 
or  the  corporation  itself  can  call  in  question  the  vahdity  of  any 
exaction  which  the  State  may  requii-e  for  the  grant  of  its  pr.v- 
ilecres.  It  does  not  lie  in  any  foreign  corporation  to  complain  that- 
it  Ts  subjected  to  the  same  law  with  tiie  domestic  corporation. 

In  a  certain  sense  the  imposition  of  an  organization  ta»  w  M 
much  the  levying  of  a  franchise  tax  as  the  imposition  by  a  State 
of  annual  tiixes  upon  corporations  in  return  for  the  right  to  exer- 
cise their  corporate  powers  witiiin  tiie  jurisdiction  of  the  State. 
The  one  has  been  defined  to  be  a  "franchise  to  be,'  and  tiie  otiier 

as  a  "  franchise  to  do."*  «•  _ 

(8)  What  effect,  if  any,  has  the  Interstate  Commerce  CTause 
of  the  Federal  Constitution  upon  the  right  of  the  several  States 
to  impose  lioensij  taxes  upon  corporations  engaged  m  interstate 
commerce?   Sta-ictly  speaking,  the  imposition  of  a  franchise  tax 
has  reference  only  to  domestic  corporations,  whUe  licenM  taxa, 
when  applied  to  corporations,  have  reference  not  only  to  domestic 
corporations,  but  to  foreign  corporations  as  well.    Foreign  coi- 
poMAions,  as  such,  can  be  taxed  by  foreign  States  only  upon 
Corporate  property  sitiiated  within  such  foreign  State,  or  upon  tiie 
business  done  there.   They  cannot  be  taxed  in  a  foreign  State  on 
account  of  their  corporate  franchises,  as  that  was  not  given  by 
tiie  laws  of  the  foreign  State  but  was  dependent  upon  the  laws  of 
the  State  of  its  creation  and  had  an  existence  separate  therefrom. 
A  corporation  may,  ttirough  its  agent.,  extend  its  operations  into 
other  States,  and  thus,  metaphorically  speaking,  go  tiiere;  but  it 
never  really  travels,  and  its  franchises  exist  only  at  tiie  place  of 
its  domicile  and  residence.^ 

Expre-  Co.      OUo.  16.  v.  Coite.  6  Wall.  606,  By.  Co, 

TT  ft       •  Home  Insurance  Co.  v.  New   142  U.  S.  227.  i^r  ir 

m'u  TeOO,  Reading  R.  R.  ».       '  People. Equitable Tna.t Co.. 96 SNT. 
PH»^lY»u^  15  W»a.  296  J  State  B.  B.  S87;  PUmptoD  v.  Bigelow.  93  S.  T.  5M. 

205 


§183  INOOBFOSATIOH  AKD  (XMAHHATIOIV  OF  OOBPORATIONi.  [PART  I. 


On  the  other  hand,  tiiere  is  clear  diirtiiietion  between  a  license 
tax  and  a  property  tax.  The  former  involves  a  charge  for 
permission  or  authority  to  transact  certain  business,  while  the 
latter,  when  applied  to  corporations,  is  a  contribution  imposed 
upon  and  measured  by  the  property  of  ike  corporation.1 

The  right  to  impose  a  license*  tax  npon  corporations  is  snbject 
to  tiie  following  limitation :  If  the  tax  is  essentially  a  regulation 
of  interstate  commerce  and  its  imposition  does  not  constitute 
a  proper  exercise  of  the  police  power  of  the  State,  then  it  comes 
within  the  inhibition  of  the  Interstate  Commerce  Claiise  of  the 
Federal  Constitution.* 

Again,  in  Pemhiiia  Consdidated  Silvw  Mining  &  Milling  Co. 
V.  Pennsykania,*  the  United  States  Supreme  Court  spoke  as 
follows : 

**  The  exaction  of  a  license  fee  to  enable  the  corporation  to  have  an 
office  for  the  transaction  of  its  business  within  a  foreign  State  is 
clearly  within  the  competency  of  the  legislature  of  that  State.  The 
recognition  of  the  foreign  corporation's  existence  in  a  foreign  State, 
even  to  the  extent  of  allowlDg  it  to  have  an  office  within  its  limits 
for  the  use  of  its  officers,  agents,  and  employees,  was  a  matter  de- 
pendent upon  the  will  of  the  State.    It  coold  make  the  grant  of  the 
privilege  condi^onal  npon  payment  of  a  license  tax  and  fix  the  same 
according  to  the  amount  of  the  anthorized  capital  of  the  corporation. 
The  absolnte  power  of  exclusion  includes  the  right  of  a  conditional 
and  restricted  exercise  of  its  corporate  powers  within  the  State,  v 
The  equal  protection  of  the  laws  which  these  bodies  may  claim  is  only 
such  as  is  accorded  to  similar  associations  within  the  jurisdiction  of 
the  State.    The  plaintiff  in  error  is  not  a  corporation  within  the 
jurisdiction  of  Pennsylvania.    The  office  it  hires  is  within  snch  juris- 
diction, and  on  condition  that  it  pays  the  required  license  tax  it  can 
chiim  the  same  protection  in  the  use  of  the  oflSce  that  any  other  cor- 
poration having  a  similar  office  may  claim.   It  would  then  have  the 
equ^  protection  of  the  law  so  far  as  it  had  anything  within  the 
jurisdiction  of  the  State,  and  the  constitutional  amendment  requires 
nothing  more.    The  State  is  not  prohibited  from  discriminating  in 
the  privileges  it  may  grant  to  foreign  corporations  as  a  condition  of 
their  doing  business  or  hiring  offices  within  its  limits,  provided 
always  such  discrimination  does  not  interfero  with  any  transaction 

1  Cooley  on  Taxation,  2nd  ed.  pp.  383,       2  People  ex  rel  PeniujhsBia  B.  B. 

576 ;  Welton  v.  Missouri,  91  U.  S.  275 ;  Wemple,  138  N.  Y.  1. 
Emert  v.  Missouri,  156  U.  S.  296.  «  125  U.  S.  181. 

206 


CHAP.  VI.]  LEGISLATIVE  CONTROL  OVER  FOREIGN  CORPORATIONS.  §  ISS 


by  such  corporations  of  interstate  or  foreign  commerce.  It  is  not 
every  corporation  lawful  in  the  State  of  its  creation  that  other  States 
may  he  willing  to  admit  within  their  jurisdiction  or  consent  that  it 
have  offices  in  them;  such,  for  example,  as  a  corporation  for  lotteries. 
And  even  where  the  business  of  a  foreign  corporation  is  not  unlawful 
in  other  States  the  latter  may  wish  to  limit  the  number  of  such  cor- 
porations  or  to  subject  their  business  to  such  control  as  would  be  in 
accordance  with  the  policy  governing  domestic  corporations  of  ^  a 
similar  character.  The  States  may  therefore  require  for  the  admis- 
sion within  their  limits  of  the  corporations  of  other  States,  or  of  any 
number  of  them,  such  conditions  as  they  may  choose,  without  acting 
in  conflict  with  the  concluding  provision  of  the  first  section  of  the 
Fourteenth  Amendment. 

« The  only  limitation  upon  this  power  of  the  State  to  exclude  a 
foreign  corporation  from  dohig  business  within  its  limits,  or  hiring 
offices  for  that  purpose,  or  to  exact  conditions  for  allowing  the  cor- 
poration to  do  business  or  hire  offices  there,  arises  where  the  cor- 
poration is  in  the  employ  of  the  Federal  Government,  or  whero  its 
business  is  strictly  commerce,  interstate  or  foreign.  The  control  of 
such  commerce,  being  in  the  Federal  Government,  is  not  to  be 
restricted  by  State  authority." 

In  Waters  Pierce  Oil  Co.  v.  Texas  ^  it  was  said  that : 

*^  Having  no  absolute  right  of  recognition  in  other  States,  but  de- 
pending  for  such  recognition  and  enforcement  of  i^s  contracts  upon 
their  assent,  it  follows,  as  a  matter  of  course,  that  such  assent  may 
be  granted  upon  such  terms  and  conditions  as  those  States  may 
think  proper  to  impose.  They  may  exclude  the  foreign  corporation 
entirely;  they  may  restrict  its  business  to  particular  localities,  or 
they  may  exact >suoh  security  for  the  performance  of  its  contracts 
with  their  citizens  as  in  their  judgment  will  best  promote  the  pubUo 
interest.    The  whole  matter  rests  in  their  discretion." 

In  Hooper  v,  Oalifomia^  conditions  imposed  upon  a  foreign 
corporation  were  considered,  and  a  statute  was  sustained,  making 
it  a  misdemeanor  for  a  person  in  California  to  procnre  insurance 
lor  a  resident  in  that  State  from  an  insurance  company  not  mcor- 
porated  under  its  laws,  and  which  had  not  filed  a  bond  required 
by  the  law  of  the  State.  All  preceding  cases  were  cited,  and  it 
was  assumed  as  settled  that  the  right  of  a  foreign  corporation  to 
engage  iu  business  within  a  State  other  than  that  of  its  oreatioii, 

1177  U.S.  28.  •166U.S..648  J  3»L.Ed^2^97. 


§  133  INCOBPORATION  AND  ORGANIZATION  OF  COBPOBATIONS,  [PABT  I. 


depends  solely  upon  the  will  of  snch  other  State. "  And  the  ex- 
ception to  the  rule  was  stated  to  be  "  only  cases  where  a  corpora- 
tion created  by  one  State  rests  its  right  to  enter,  another  and 
to  engage  in  hasiness  thereui  upon  ihe  federal  nature  of  its 
business.*' 

A  State  may  tax  the  franchise  of  a  domestic  corporation  or 
impose  a  license  tax  upon  a  foreign  corporation,  but  can  only 
subject  a  corporation  engaged  in  interstate  commerce  or  in  the 
employ  of  the  general  government  to  such  property  taxation  as 
only  incidentally  afPeets  its  occupation,  as  all  business,  whetlier  of 
individuals  or  corporations,  is  affected  by  common  governmental 
burdens.^ 

^  The  power  to  license  is  a  police  power,  although  it  may  be  exer- 
cised for  the  purpose  of  raising  revenue.^  But  ilie  State  in  the 
exercise  <rf  tbe  police  power  cannot  impede  interstate  c<Mnmerce 
by  dwcrimtnating  taxes.* 

The  question  next  arises  as  to  what  constitutes  a  proper  exer- 
cise of  the  police  power  on  the  part  of  a  State.  A  State  may  law- 
fully  in  the  exercise  of  this  power  i»>ovide  for  security  of  lives, 
linabs,  health,  and  comfort  of  persons  and  protection  of  property, 
or  in  regulation  of  highways,  canals,  railways,  and  other  commer- 
cial facilities,  passage  of  laws  to  regulate  sale  of  articles  deemed 
injurious  to  health  or  morals  of  community ;  imposition  of  taxes 
on  persons  residing  within  the  State  and  upon  occupations  pursued 
therem,  not  directly  conneeted  with  foreign  or  interstate  com- 
merce or  with  some  other  business  exercised  under  authority  of 
the  United  States  and  imposition  of  taxes  upon  all  property 
within  the  State  mingled  with  and  forming  part  of  the  great  mass 
of  property  therein.*  ' 

(4)  What  effect,  if  any,  has  the  interstate  commerce  clause  of 
the  Federal  Oonstitntioii  upon  tbe  right  of  the  several  States  to 
impose  property  taxes  upon  corporations  engaged  in  interstate 

commerce  ? 

IT  I  ^  TfhgMpi  Co,  II.  155  576 ;  Philadelphia,  etc.  Ass'n  v.  New  York, 

a  w     '     n  fl.  ®-  saver  Mining  Co.  v. 

2  W.ggin.  Co.  1^  Btrt  fiH.  Lodi,  1S7   New  York,  143  U.  8.  805;  Poitel.  etc 

^•r,  Cable  Co.  v.  Charleston,  153  U.  S.  698: 

8  Austm  V.  Tennessee,  179  U.  S.S44;    Martin  v.  K  R.,  151  U.  S.  677;  Hoopers 

T^VK^'''^^-J^-5-^^^^-  California,  155  U.  S.  652;  BonZn 

trfl^n  Q^'.S^^^L^  t!!L?";  R^il^'^y.  125  U.S.  491;  Smith  ..Alabama, 
trict,  120  U.  8.  498.  See  atao  Liverpool  124  U.  S.  474. 

laa  Oa.  V.  MaMehMetti^  10  WaQ.  (U.  8.) 

208 


pHAP.  YI.]  LEGISLATnrE  CONTROL  OTEB  FOBEIGN  C0BP<mATI0NS.  §  133 

A  State  may  tax  corporations  for  their  privileges  within  the 

State  in  lieu  of  all  other  taxes,  provided  the  amount  is  made 
dependent  on  the  value  of  its  property  within  the  State  and  pay- 
ment is  not  a  condition  precedent  to  the  right  to  carry  on  its 
business.  The  tax  then  becomes  a  mere  property  tax  and  not  an 
interference  with  interstate  commerce.^ 

The  existence  of  federal  supervision  over  interstate  commerce 
is  not  inconsistent  with  the  power  of  the  State  to  control  its 
internal  commerce  and  to  tax  franchises,  property,  or  business  of 
domestic  corporations  engaged  in  such  commerce,  nor  with  power  • 
to  tax  foreign  corporations  on  property  within  the  State.'  In  this 
connection  it  has  been  well  said  that 

"commerce  between  the  States  consists  of  intercourse  and  traffic 
between  their  citizens  and  includes  the  transportation  of  persons  and 
property,  and  the  navigation  of  public  waters  for  that  purpose  as 
well  as  the  purchase,  sale,  and  exchange  of  commodities.  It  makes 
no  difference  whether  such  commerce  is  carried  on  by  individuals  or 
by  corporations.  It  is  true  that  the  property  of  corporations  engaged 
in  foreign  or  interstate  commerce,  as  well  as  the  property  of  cor- 
porations engaged  in  other  business,  is  subject  to  State  taxation, 
provided  always  it  is  within  the  jurisdiction  of  the  State.  Where 
there  is  jurisdiction  on  the  part  of  the  State  neither  as  to  persons 
nor  property,  the  imposition  of  a  tax  is  unconstitutional  and  void. 
If  the  legislature  of  a  State  enacted  that  the  citizens  of  another 
State  or  country  should  be  taxed  in  the  same  manner  as  the  persons 
wit^iin  its  own  limits,  and  subject  to  its  authority  or  in  any  other 
manner  whatsoever,  such  a  law  would  be  as  much  a  nullity  as  if  in 
conflict  with  the  most  explicit  constitutional  inhibition.  Jurisdiction 
is  as  necessary  to  valid  legislative  as  to  valid  judicial  action.  It  has 
been  repeatedly  decided,  and  is  settled  law,  that  a  tax  upon  the  capital 
stock  of  a  corporation  is  a  tax  upon  its  property  and  assets  ;  that  it 
is  undoubtedly  competent  for  the  legislature,  to  lay  a  franchise  or 
license  tax  upon  foreign  corporations  for  the  privilege  of  doing  busi- 
ness within  the  State,  but  that  such  a  tax  is  in  no  sense  a  license  tax. 
It  is  a  fundamental  principle  that  in  order  to  tax  the  corporation  it 
must  have  a  domicile  within  the  State ;  that  when  it  is  sought  to  tax 
capital  stock  of  a  corporation,  the  law  imposing  such  a  tax  must  be 
construed  to  mean  so  much  of  the  capital  stock  as  is  measured  by  the 
property  actually  brought  within  the  State  by  the  corporation  in  the 
transaction  of  its  business.    To  the  States  must  be  conceded  power 

1  Poitel  TeL  Co, «.  Adaina,  158  U.  8.      ^  Erie  B.  JEt.  v.  Ptemsfhaiiia.  158 
•»«.  D.  S.  437. 

1*  209 


§  133  INCORPORATION  AND  OfiOANIZAIKm  OF  00«P««41l01ia  [PABTl; 

to  exclude  foreign  corporationf  tltogethcr  from  its  bofdezs  or  to 
impose  a  license  tax  so  heavy  as  to  amotmt  to  the  same  tiling.  They 
must  be  denied  the  power  to  tax  either  persons  or  property  not 
within  their  jurisdiction."  * 

1  Gloucester  Ferry  Co.  r.PeoiuiylTania,  186  U.  S.  110  J  Atlihj  v,  Byan,  158 

114  U.  8. 196.  SeeakoFliilfldelphi^ete.  U.  8.  446;  Erie  R.  R.  v.  Pennsylvania 

Steuodup  Co.  9.  Pennsylvania,  122  U.  S.  158  U.  S.  437 ;  New  York  State  9.  BobMt^ 

S4ft;  N«tiollE,fl&  S.R.v.FMHii7lfMua»  mU.S.66S. 


GENERAL  INDEX. 


[Hit  lefeiciioei  am  to  pagvt.] 


ABANDONMENT, 

non-nser  of  cofporale  franehiae  m  a  ground  for  forfeitnie  .  •  ISA^IS$ 

of  oorporate  powers  158-150 

suspending  ordinary  businOM    ••••  ,  100 

ABSENT  STOCKHOLDEBS, 

may  vote  by  proxy  #0,  lOi 

ACCEPTANCE, 

by  State  of  surrender  of  charter   ,155 

necessity  of  acceptance  of  resignation  of  directors    ...       .  101 
ACCEPTING  BENEFIT, 

in  its  relation  to  doctrine  of  estoppel   ,   .  63 

ACCOUNT  BOOKS.    (See  Books  of  Accouvt.) 
ACKNOWLEDGMENT, 

of  certificate  of  incorporation   ••••••••  7d-80 

ACQUIESCENCE, 

effect  of  64 
ACTIONS, 

by  creditors  142-143 

by  State  to  enforce  forfeiture  of  charter  157-158 

by  stockholders  156-157 

for  assessm^ts  142 

ADOPTION.   (See  Ratification.) 

ADOPTION  OF  BY-LAWS  99-100 

by  directors  •  75 

ADTANTA6ES, 

of  corporate  oiganisatbn  •  4-5 

Af IIDAVIT, 

aati-mist  81 
as  to  amount  of  stock  paid  in  72-73 

snbeeribed  •  •  •   .  .  81 

as  to  payment  of  Bto^  

as  to  publication  $q 

AGENT, 

appointment  of  180 

certificate  of  appointment  of     ••••••  im 

service  of  process  upon  1  lH 


6ENEKAL  INDEX. 


AGREEMENTS, 

to  oooflolidsto    •••••••••••••••••  TT 

▼oting  trust  ••••••••••»•••••••  108 

AUENATION, 

of  famchiae  of  bring  %  eorpogatioii  not  pcrmHtad  .   •   •  •  •  51-52 

power  of ,  by  eorpoiitioiui    •••••  51-^ 

f  f  I  iclffij 

may  be  directors   •••  101 

may  become  iaeoiporatorB    •••••••••••••  Id 

ALTERATION,  ' 

of  by-laws  •  100 

of  charter  .    •   •  •  •    46, 145-152 

of  name  41 

of  number  of  directors  46 

of  par  value  of  shares  57 

AMBIGUITIES, 

in  corporate  grant  it  leaolved  in  favor  of  pa^c  77-78 

AMENDMENT, 

change  of  capitalization  41 

eoiporate  agent  •  47 

domieiliary  oAee  ••••••••  42 

daraliim  of  eotpomte  eiigteaee  •  UMl 

MM   41 

number  of  direeton  ••••••••••••  46 

par  Talue  of  sharea    ••••••••••••  57 

place  of  bnsineeB  47 

powers  56-57 

purposes  ••••    46, 145-152 

decrease  of  capital  stock   41 

increase  of  capital  stock  •    .  41 

of  charter  by  directors  146 

stockholders    .   145-152 

of  eharteia   ^.  •  145-162 

befofe  offgaalwtioa  58 

AMOTION, 

of  direetors   •••••••«  8(MI1 

ofolBoeia  (K>-81 

AMOUNT, 

limitations  upon  amount  of  ei^^tal  atodc    •••••••  89-70 

of  ftoeik  paid  in  72 

subscriptions  70-71 

with  which  a  corporation  may  begin  buaineia  •  •   •  •  73 
ANNUAL  LICENSE  TAX, 

upon  foreign  corporationa  199-202 

ANNUAL  MEETING, 

date  of   •   •  • 

place  for  holding  ••••   ••••  40 

ANNUAL  REPORTS.    (See  Skpobts.) 

ANTI-TRUST  AFFIDAVIT  .   .   .   .   ;  •   •   •   •  81 

ANTI-TRUST  LEGISLATION  167-168 

884 


OESmAh  INDEX. 


APPLICATION  FOB  CHARTERS, 

form  of   •    •  J2 

refusal  of   «),ra-«JI 

APPOINTMENT, 

of  executive  committee   lan 

of  resident  agent   1^ 

APPRAISAL  OF  PROPERTY, 

by  directors   |^7-I38 

by  State  olBcialB   Al 

taken  by  a  oorpoi»laon  in  exchange  for  captal  ifcock    .   .   .  137-138 

ARTICLES  OF  AGREEMENT, 

purpose  of  

ARTICLES  OF  ASSOCIATION, 

synonymous  with  charter  •   •   •  11 

ARTICLES  OR  CERTIFICATE  OF  INCORPORATION, 

acknowledgment  of  i;,-^7?o 

amendment  of  •  14o-lo2 

contents  of    ....  •  

defects  in  ^ 

evidentiary  effect  of  '  *    '    oa  *oa_St 

filing,  publishing,  and  recording  of   80,  86-W 

miscellaneous  provisions  relative  to  contents  of  76-77 

publishing  ^2 

recording  •  

remarks  on   * 

......  7v 

sigmng.  • 

tjnxmjmom  with  charter   u 

ASSENT  OF  STOCKHOLDERS, 

toby-laws   ^2 

to  preferred  stock    ^ 

ASSESSMENTS, 

forfeiture  of  shares  for  nqn-payment  of  stock  108-109 

power  to  levy  

ASSETS,  ^  • 

of  corporations  liable  for  their  debts  1** 

power  of  corporation  to  dispose  of  its  entire  61-52 

ATTORNEY-GENERAL, 

approval  of  articles  by  7? 
bringing  of  quo  warranto  proceedings  by     •  !»• 

BENEFITS,  ^         ^  . 

doctrine  that  the  reception  of  benefits  under  an  ullra  vires  contract 

cuts  ofE  the  right  to  set  up  its  illegality  63 

BEQUESTS, 

power  of  corporation  to  accept   oa 

BOARD  OF  DIRECTORS.    (See  Directors.) 

BOARD  OF  MANAGEMENT  ^ 

BONA  FIDE  PURCHASERS  OF  SHARES, 

liability  of,  to  creditors  :   .   .   .   .  .171-172 


665 


GENERAL  INPEZ. 


BONDED  INDEBTEDNESS, 

limitations  upon  (See  Part  II.) 

BONDHOLDERS, 

right  to  participate  in  election  of  directors  07 
BONDS, 

power  to  issue  ••••••  00 

BONUS, 


to  be  paid  to  the  State  upon  creation  of  corporation!    •  •  •  84-85 


BONUS  STOCK,  X48 
BOOKS, 

inspection  of  corporate    ,   165-167 

open  to  inspection  of  creditors  165-167 

stockholders      .........  165-167 

what  books  corporations  required  to  keep  (See  Part  II.) 

where  kept  65-66 

BOOKS  OF  ACCOUNT.   (See  Books,) 
BORROW, 

incidental  power  of  corporations  to  ,  00 

BREACHES  of  TRUST, 

by  directors  .174-176 

BURDEN  OF  PROOF, 

when  thrown  upon  creditors  in  attacking  yalnation  of  property 

taken  in  exchange  for  stock  125-137 

when  thrown  upon  stockholders  in  attacking  valuation  of  property 

taken  in  exchange  for  stock  125-137 

BCrSINESS, 

entire,  may  be  transacted  ostride  of  domiciliary  State  ....  40 

power  to  trati8aet,oiitade  of  doimdifiaiy  Stale  38-40 

IHrindpal  plaoe  of   •   .  06 

BUSINESS  GORPORATIOK, 

TiMwmIng  of  term  0 

BX-LAWS, 

adoption  of  •  ^  90-100 

by  direeloft  n...   75 

alteration  of  90-100 

book  of  *  .   .   .   .  100 

definition  of  00 

inherent  power  to  mak«  33 

mode  of  enacting  33 

power  of  directors  to  adopt   65-56 

of  stockholders  to  adopt   ,  99 

to  enact  33 

to  inflict  penalties  for  violation  of  (See  Part  II.) 

■latatory  proTlsions  lelatiYe  to  loo 

C. 

CAPITAL, 

Mabifity  of  direetors  for  deelaring  dividenda  Out  of  174 

wbalisiWliflnafpiiedtoeoipoiiSiioiit  07-68 

.  666 


GENE&AL  INDEX. 


CAPITAL  STOCK,  ....  41 

decrease  of   •* * 

definition  of  

increase  of   *  112-113 

r==:U«^*oi   ^^'^''Vm^d 

manner  of  payment  of  

payment  of,  in  cash  120-1'^'^ 

p~p?^  m 

services  

CEETIFICATE  OF  CAPITAL  STOCK,  ^   ^  ^^^^^^ 

when  must  issue  110-111 

who  entitled  to  *   *.  UO-IU 

who  must  sign  '    '    r  1^ 

CERTIFICATE  OF  INCORPORATION.   (See  AeticlW  orlmoom- 

PORATION.) 

CERTIFICATE  OF  ORGANIZATION,  ^   ^  ^ 

synonymous  with  charter  ''*'*'%** 

CHANGE  IN  ARTICLES.    (See  AnKHDMBirr  TO  Abmclm.) 
CHANGE  OF  CORPORATE  NAME  •  •  " 

CHARTERS,  ,   .   •  77-78 

construction  of  ^ 

creation  of  corporationi  under  

definition  of  * ' 

essentials  of  ^ 

form  in  which  granted  * 

nature  of  

(See  also  Articles  of  Incobporation.) 
selection  of  matters  to  be  inserted  in   .   .   .  (See  Part  lU.  642-644) 

CITIZENS, 

meaning  of  term  in  federal  constitution  *^ 

CITIZENSHIP  OF  CORPORATIONS  ^ 

CLASSIFICATION, 

of  directors  *  " 

of  incorporation  acts  »...  •••• 

COLLATERAL  ATTACK,  21-81  SS-W 

upon  corporate  existence  

upon  corporate  powers   

upon  corporate  purposei   

COMBINATIONS,  ,        .  ,  * 

in  restndnt  of  trade,  unlawful  trusts  few  the  control  of  corpora, 
tions  and  the  prevention  of  competition  among  tiiem  .   .   .  lOi-ioa 

COMITY,  tQjt  iftA 

doetriue  of  State  ^^^^ 

COMMENCE  BUSINESS.  . 
time  within  which  corporation  must  organize  and    .   .   .   '  ^"^^^^^ 

when  corporation  entitled  to  ^"^  n  i 

COMMENCBMENT  OP  CORPORATE  EXISTENCE  .   ...  9i-94 

COMMENCEMENT  OF  OPERATIONS   (See  Commence  Bitsixf.ss.) 
SJSIeCE  CLAnSBOP  THE  FEDEEAL  CONSTITUTION^  202-210 


G£N£RAL  INDEX. 


GENERAL  INDEX. 


COMMERCIAL  PAPER.   (See  Neootiabls  Instbuments.) 

COMMISSIONERS, 

to  take  stock  sabscriptious  99 
COM.MITTEE, 

executive  ^  107-108 

COMMON  LAW  POWERS, 

definition  of  •••••••••••  30-31 

enumeration  o£.*    .....,«.^  30-til 

COMPANY, 

does  not  imply  incorporation   14 

COMPETITION, 

combinations  or  trusts  among  corporations  for  the  prevention 
of   .   •    .  167-168 

CONCLUSIVE, 

meaning  of,  in  relation  to  eyidentiary  elEect  of  documents  •   •    •  26 

CONDITIONS, 

imposed  upon  domestic  corporations  with  reference  to  transaction 
of  business  within  State  145-179 

imposed  upon  foreign  corporations  with  reference  to  transaction 

of  bvidiiess  wHhin  Stete  180-210 

CONDITIONS  PRECEDENT, 

to  coming  into  ezistenee  as  a  oorporatipn  93 

CONDITIONS  SUBSEQUENT, 

forfoitoie  of  chartsn  oil  the  happening  of  93 

CONSOLIDATION, 

meaning  of  40 

payment  of  taxes  iqpem  $5 

ivgnlation  of  lifjtA  of  17&-179 

CONSOLIDATION  OF  CORPOBATIONS, 

when  power  exists  •  99 

CONSTITUENT  ACTS, 

power  to  perform  outside  of  domicHiary  State  40 

CONSTITUTIONAL  LAW   181,202-210 

CONSTITUTIONAL  PROVISIONS, 

creating  indindnal  KaMMty  of  stockholders  for  eorporate  debts  169-174 
CONSTITUTIONAL  RESTRAINTS, 

lehitiTe  to  impairii^  the  citations  of  oontraeta'  153-151 

npon  the  creation  of  corpmtions  ••••  9 

CONSTRUCTION  OF  CHARTER  rT-79 

CONTRACT^ 

impairing  obligation  of  •  •  •   .  77-78 

power  of  ccarpotations  to  make  00 

CONTROL  Oi*  QQRFORATiONS, 

who  entitled  to  ..•«  102 

CORPORATE  AGENTS, 

powor  to  appcMnt  •  •••  83 

CORPORATE  BOOKS.  (See  Books.) 
CORPORATE  ELECTIONS.   (See  Euccnoirs.) 
.068 


CORPORATE  EXISTENCE,  at  aa 

collateral  attack  upon  .    .   21-28,88-92 

duration  of  .J^lt 

extension  of  Aft_ii 

*  power  to  extend  ^0  41 

proof  of  

right  of  State  in  direct  proceedings  to  attack  90-9l 

when  commences  

CORPORATE  NAME, 

not  alienable .  

power  to  diange  ^| 

right  to  

CORPORATE  OFF ICERS» 

election  of  ^^^^^J 

power  to  appoint  

CORPORATE  POWERS, 

at  common  law  •   30  31 

classification  of  29-30 

collateral  attack  upon  21-28 

consolidation  of-..«  

definition  of   30,  34,  59 

enumeration  of  34-35 

express   30,34,36 

financial  ^ 

implied  30-31,69 

ini^dental.   .   .   .   .   ,  80,59-60 

powOT  of  amotion  60-61 

to  give  and  accept  evidences  of  deht  •  60 

mortgage  and  pledge  60 

pnrcdiase  corporation's  own  stock  •^  •  36-37 

purchase  stock  in  other  corporations  «   •  .  •  •  •   *  37-38 

CORPORATE  PURPOSES* 

collateral  sttadc  upon  .  •   15-19 

illegal  

number  Qf   19-20 

CORPORATE  SEAL, 

right  to  adopt  and  use  ft  ^ 

CORPORATIONS, 

cannot  be  <»eated  by  voluntary  agreement  10 

cannot  become  incorpocatois    •  1^ 

citizenship  of  ^ 

common  law  powers  of    •   •  ^® 

consolidation  of  178-179 

created  by  special  act  9-10 

de  facto  corporations  87-88 

definition  of  

domicile  of  ®® 

express  powers  of  34-86 

eztennou  of  corporate  existence  ,   .   .   .   .  10-41 

for  what  purposes  may  be  fovraed  It 

669 


G£N£BAL  INDEX. 


CORPORATIONS  ^  continued, 

iocidental  powers  of   59-60 

iiaiDe^if  14 

i  power  of  minonlj  stot^bolden  to  eompel  purcbM  .  47 

lo  amend  artieks  before  organiwtioii  58 

appoint  executive  committee   59 

authorize  directors  to  adopt  bj-laws  56-^ 

authorize  voting  by  proxy  40 

bestow  upon  boodholder'B  right  to  yote  at  eoiporale 
elections    ••••••••    ••••,,,  |J7 

borrow  money  ,  60 

change  corporate  domicile  47 

change  corporate  name  ^  4^ 

change  corporate  purposes  "4g 

change  namber  of  directors  43 

change  par  value  of  shares  57 

change  principal  place  of  bnsinesi  47 

^  classify  directors    ..•^..^  57-58 

diminish  corporate  powers  •   •   .  57 

dispose  of  corporate  assets  as  an  entirety  ....  51-5S 
enforce  a  lien  upon  stock  to  secure  payment  of  corporate 

debts  ,    .   .   ,  47-48 

enlarge  corporate  powers   56 

forfeit  stock   48-4d 

increase  or  decrease  capital  stock  41 

insert  provision  for  regulation  of  internal  affairs  .    .  53-55 

issoe  preferred  stock  41-45 

issue  stock  in  azehaogie  for  services  or  property  .  .  49-50 
levy  assessmoits    •••«......,.  48-49 

make  contracts   ^   ^  00 

perform  constituent  acts  ,  40 

{>ermit  cumuhitive  voting  49 

purchase  its  own  stock  86-37 

purchase  stock  in  other  corporations  87-38 

surrender  charter  before  orgamzation  58 

transact  business  outside  of  domiciliary  State  .   •   .  38-40 

voluntarily  dissolve  the  corporation  62-53 

steps  necessary  to  creation  of  12 

time  witiiin  whkdi  corporation  must  organize  109-110 

where  can  be  created  by  special  act   g 

CORPORATOR  j2 

COUNTY  OFFICES,  y 

filing  and  recording  in   ,  86 

CREDITORS, 

directors*  liability  to  174-176 

right  of,  to  enforce  stockholders'  liabilily  for  corporate  debts  .  169-174 

inspect  corporate  books  ,  .165-167 

stockholders'  liability  to.«.,«.«^,,,,,  160-174 

CUMULATIVE  VOTING. 

at  corpoiata  eleetioiis   ••••••  49 

670 


GENERAL  INDE& 


D. 

DARTMOUTH  COLLEGE  DECISION  153 

DATE  OF  ANNUAL  MEETING  •  74 

DEBTS, 

limitation  npon  account  of  corporate  74-75 

power  of  corporations  to  incur  ••   60,  74-75 

DECREASE  OF  CAPITAL  STOCK  41 

DE  FACTO  CORPORATIONS,  «r-9a 

DEFAULT, 

in  payment  of  annual  tax,  effect  of    ••••••••••  160 

DEFINITIONS, 

business  corporation    .  ,  .   0 

capital  stock   •   .   •   •   68 

incorporation   ^ 

incorporator  ••••..«••••  12 

shares  cS.  stock   ...,..••.••  68 

BE  JURE  CORPORATIONS  86-90 

DELEGATION, 

of  powers  (rf  board  of  direettm  to  exeentiye  committee  .   .   .  107-108 
DEVISES, 

power  of  corporations  to  accept  88 

DBflNISmfF^, 

of  corporate  powers  63 

DIRECTORS, 

adoption  of  by-laws  by   75 

appraisal  of  property  by  ....   ..  137-138 

classification  of  57-58 

election  of   .  .100-104 

first  meeting  of   105-107 

named  in  certificate  are  directors  de  jure      .    .    ,   67 

power  to  adopt  by-laws  55,  96 

appoint  executive  committee  56 

change  number  of..  46 

Yote  by  proxy  •  108 

qualification  of  *....«...  101-102 

(See  Board  of  Mahagbmbiit.) 
statntory  Ualnlity  of....  174-178 

DIRECTORY  PROVISIONS, 

what  are  81 

DISQU  ALIFIC  ATION, 

for  the  office  of  director  •••••^  •••  101 

DISSENTING  DIRECTORS, 

provisions  for  the  exoneration  of,  from  statutory  liability  •  •  154-107 

DISSOLUTION, 

involnntaiy  ....•••..  158-157 

voluntary  ••••..    52-53, 155-150 

DISSOLUTION  OF  CORPORATIONS   52-58, 154-187 

671 


OBNEBAL  INDBX. 


DISTINCTION, 

belweeD  de  jure  and  de  facto  eofporaticnui  • 

DIVIDENDS  

DOCTRINE  OF  ESTOPPEL   • 

DOCTRINE  OF  STATE  COMITY  

DOCTRINE  OF  ULTRA  VIRES  

DOING  BUSINESS, 

what  oonstitiites  doing  bnnness  by  a  foroign  ooipor^  • 

DOMESTICATION, 

of  lorragn  oorporations  

DOMESTIC  CORPORATIONS  

DOMICILE, 

corporate  

DOMICILE  OF  CORPORATIONS^ 

power  to  change  oorpearato  

DOMICILIARY  OFFICE  

DOUBLE  LIABILITY, 

of  stockholders  to  ereditora  

DUMMY, 

directors  •  •• 

incorporators 

DURATION, 

of  corporate  existence  

limitations  upon  

of  office  for  directors    •••  •••• 


87-88 
.  174 

G3-65 
184-190 
61-65 

190-195 


.  198 
65-66 


.  47 

65-66 

.  173 


U 
U 


73-74 
154-155 
.  102 


E. 


EFFECT, 
of  ai 


of  property  by  directors  137-138 
state  offienls  139-141 


ELECTION, 

of  corporate  offieecs 
ELECTIONS, 

corporate  .«••  100-104 

of  directors  100-104 

ELEEMOSYNARY  CORPORATIONS    •   •   •   •   ^ 

EUGIBILITY, 

as  an  incorporator  •  

to  office  of  director  100-104 

ENLARGEMENT, 

of  corporate  powers  ^ 

EQUAL  PROTECTION  OF  LAWS  181 

ERROR  OF  JUDGMENT .  136 

ESTOPPEL, 

doctrine  of,  in  pais  0'>-q» 

in  case  of  ultra  vires  contracts  63-64 

to  deny  corporate  existence  28 

672 


GENIAL  INDEX. 


EVIDENCE,  .   .  m 

meaning  of  conclusive  .   .   .   •   •   ^ 

pnma  facie  .*  24^26, W-8a 

of  corporate  existence   74J75 

EXCESSIVE  DEBTS  

EXECUTION, 

of  articles  of  incorporation  

EXECUTIVE  COMMITTEE,                               ....  107-108 
appointment  of  .    .    •    •   .    .    •  ^ 

power  of  directors  to  appoint  ^ 

powers  of  executive  committee  of  directors  

EXEMPTION,  75 

of  stockholders  from  personal  liability  • 

EXISTENCE  OF  CORPORATION.   (See  Corporate  Exibtbucb.)  ^ 

EXPIRATION  OF  CHARTER   17 

EXPRESS  POWERS,  .   .   .   •   •  84-87 

definition  of  *  84-87 

enumeration  of  

EXTENSION,  ^  .176-177 

of  corporate  existence   g- 

payment  of  tax  npon   .  • 

EXTRA-TERRITORIAL  POWERS  38^  184-180 

F. 

FALSE  REPORT,  ,7. 
liabiUty  for  directors  making  .  

FEDERAL  COURTS,  .^s 
right  of  fcweign  corporationa  to  remove  cases  to    ......  ajo 

.  ^   84-85,  177-178 

organization  •   •   •   •  ' 

FICTITIOUS  INCREASE,  ...  128 

Ot  stock   »n  -1 40 

FICTITIOUS  STOCK  •   •  ^ 

.  FILING  CHARTER, 

in  local  county  offices  82-84 

with  State  officials  

FINANCL^-  POWERS  OF  CORPORATIONS  

FINES,                             ^               «   «  .88 
power  to  enforce  by-laws  by  pecuniary  fines  ^Lji^f 

FIRST  DIRECTORS'  MEETING  ^^^^ 

FIRST  GENERAL  INCORPORATION  ACT,  ^  ^ 

reference  to..  

FOREIGN  CORPORATIONS,  19^-202 

annual  license  tax  on  .  *  •   •   •  198-199 

license  tax  on   \'    '  •! ioiL.1flS 

penalty  for  transacting  business  without  permit   !» 

power  to  exclude  •    *  '    '    *    *    *  100.195 

what  constitutes  doing  business  on  the  part     •   •   *   *   '   '  "^^^ 
4S  673 


GENERAL  INDEZi 


o^tetrikoiia  IcMPoe  cl  ttatatei  enfndng  liability  upon  direc 


tors  and  stoekhcdden  Ififl  17fl 

lOfiFEITURE  OF  CHARTERS, 

for  inaolyenej  100 

for  misuse  or  abuse  of  eorpoiaia  powwi  •  150 

for  non-payment  of  taxes  j^jq 

for  uoQrperforowiice  of  oonditimiB  precedent    .......  160 

subte^uent  160 

for  non-user  of  corporate  franchises  .  158-159 

for  violation  of  express  statute  ...•»,,,..  160 

FORFEITURE  OF  SHARES  *  *4&^ 

FORM, 

in  whidiehartflrlsgnated  86 

FRANCHISES^  ■ 

corporation  

FRANCHISE  TAX,  *   '  * 

distinctiou  between  ^RMichise  tax  and  pmpvtiy  iu  •  •  .  .  177-178 
distinguished  from  osgaouatMNi  tes  84-85 

right  to  impoM   jyg 

FRAUD  'm-128 

FRAUDULENT  ISSUE  OF  SHARES  33 

FULL  LIABILITY  CORPORATIONS  *    *  174 

FULL-PAID  STOCK   '  142.143 

FUNDAMENTAL  CHANGES  IN  CHARTER  !  146-162 

GIFT  OF  SHARES,  ^' 

effect  id,  OB  lialrility  of  stockholders  14S-144 

•*QbOD  FAITH  RULE," 

for  payment  of  sliaraa  in  property  othar  than  money ....  123-125 
statement  of   123-126 

GRADUATED  OBGANIZATIOH  TAX. 

right  to  impoae  "  jyg 

validi^  of   ••• 

GRANT,  ......  w 

power  to  

H. 

HOLDING  OVER  BY  DIRECTORS  ^ 

I 

ILLEGAL  PURPOSES   opofl 

IMMUNITY,  '   '  • 

from  personal  liability  by  publication  of  articles  80 

IMPLIED  POWERS   59 

INCIDENTAL  FOW^tS   59.61 

INCORPORATION, 

dflftnition  of   9 

purposes  fwwhidioMpofatiQMai^  be  formed   17.19 

e74 


GENERAL  INPEX* 


INCORPORATION  ACTS, 

classification  of.  ...  

INCORPORATORS, 

aliens  may  be   •  

corporations  cannot  be  

definition  of   .    .    .  • 

dummy  

infants  cannot  be    .  .  

married  women  may  be    .   .    •  *   *   '  ml 

may  sign  articles  by  mark 

mnst  be  known  persona  

organiasation  me^g   1? 

privileges  of  .  ^ 

qoalificationa  of  •  

aynonymoos  with  eorpoiafcom  *^ 

INCREASE, 

in  par  value  of  sharea  ^' 

of  capital  stock   

INDEBTEDNESS, 

limitation  upon  corporate  

INDIVIDUAL  LIABILITY  OF  STOCKHOLDERS     ....  169-174 

INFANTS  

INSOLVENCY, 

forfeiture  of  charter  for  

INSPECTION  OF  BOORS  AND  RECORDS* 

by  creditors  

by  stockholders  16o-lb7 

INSPECTION  OF  CORPORATE  BOOKS  165-167 

INSPECTORS  OF  ELECTION  10^-104 

INTERNAL  AFFAIRS, 

provisions  for  the  regulation  of  5^5,  76,  168-169 

INTERPRETATION  OF  CHARTER  77-78 

INTER-STATE  COMMERCE, 

claose  of  the  Federal  Constitution   202-210 

INTRODUCTION  •   ^ 

INVOLUNTARY  DISSOLUTION  .  156-157 

IPSO  FACTO  DISSOLUTION  154-157 

IPSO  FACTO  FORFEITURE  157-160 

ISSUANCE  AND  PAYMENT  OF  CAPITAL  STOCK    .  .  .  im-ll» 

Jm 

LABOR  DEBTS, 

liability  of  stockholders  for  

LAND, 

power  of  corporations  to  take  and  bold  «WHI 

LAW  AND  FACT, 

questlQns  of  .  •  •  

675 


GENERAL  IKBEX. 


LEADING  INCORPORATING  STATES, 

enumerafcioii  of  •   •••8,7 

LEASES, 

power  of  oorpoifttbiw  to  accept  leaaeB  la  «iehaiigefo^  «  50,121 

LEGISLATIVE  AUTHORITY, 

easoitial  to  creation    ooiponifimis  •  10 

I^ISLATIYE  CONTROL, 

OTOr  domestic  cor]x»ratioii8  145-179 

Qfrer  foreign  corporations  •    •  180-210 

LEGISLATIVE  INVESTIGATION, 

into  corporate  affairs  

LEGISLATIVE  REGULATION, 

of  internal  affairs   167-168 

LEGISLATIVE  REQUIREMENT, 

of  annual  report   164-165 

LEGISLATURE  

LETTERS  PATENT, 

when  conclusive  as  to  fact  of  incorporation      ......  24-28 

LIABILITY, 

of  directors.    (See  Directors.) 

of  stockholders.    (See  Stockholdkba.) 
LIABILITY  OF  STOCKHOLDERS, 

ezemptloii  from  74-76 

LICENSE  TAX, 

upon  foreign  eorpontkms  10^100 

LIEN, 

e(»ponilioii's  Ben  upon  stock  <^  ste  sMmbers  to  seeme  debts 

dne  it  *7-48 

LDOTATIONS, 

npon  amount  of  capital  stoek  69-70 

upon  corpoTate  existence   74-75,  154-155 

upon  power  to  hold  real  property  32-33 

LIST  OF  SHAREHOLDERS,  ^ 

failure  to  keep  alphabetical  list  of  stockholders  not  an  ipso  facto 
dissolution  

M. 

MAJOBITT, 

of  directors  rnle  in  private  corporations  102 

of  stoekholdm Mkt^led  to contoolin  private  corporations  .   .   .  102 

MANDAMUS, 

right  of                              .    .    .    ♦   84 

MANDATORY  PROVISIONS   ^1 

MANNER  OF  PAYMENT  OF  CAPITAL  STOCK    .   .    69,  113,  120 

MANUFACTURING  CORPORATIONS                            ...  173 

MARRIED  WOMEN, 

may  be  incorporators   13 

MAXIMUM  AMOUNT, 

of  indebtedness   °2 

676 


GsnniAif  mix. 


MEETING, 

date  of  annual  74 

organization   

MEETINGS, 

of  directors  105-107 

for  election  of  directors,  where  held  104 

of  stockholders   40^  96-08, 104 

MERGER.   See  CoNSOLiDATioir. 

MINING  GOBfPANIES     .............   .  iai-182 

MINISTERIAL  DUTIES   84 

MINORITY  STOCKHOLDERS, 

power  to  compel  purchase  of  their  stock  upon  consolidation  S8-60, 102 
MISCELLANEOUS  PROVISIONS, 

relative  to  contents  of  articles  of  incorporaMon  76-77 

MISCONDUCT  OP  DIRECTORS.   (See  Amotion.) 
MISTAKES  OF  JUDGMENT, 

in  appraisal  of  property  taken  in  exchange  for  stock     ....  136 
MISUSER, 

a  ground  for  forfeiting  corporate  charter  159 

MONEY, 

payment  for  stock  in  118 

MONEY  OR  MONEY'S  WORTH"  RULE  113 

MORTGAGE, 

corporate  

power  to  go 

MORTGAGE  BONDS    iO 

K. 

NAMES  OF  CORPORATIONS, 

corporate  name  not  alienable    ,  31 

purpose  of     .    .    i   14^  31 

power  to  change  41 

protection  of  corporate  81 

right  to  a  corporate  name  ,    14,  31 

rfmikrity  in  corporate  name  forbidden  14,31 

NEGLIGENCE, 

liability  of  directors  for  175 

NEGOTIABLE  INSTRUMENTS, 

corporate  powers  relating  to  60 

NON-ASSESSABLE  STOCK  ,  141-142 

NONPAYMENT  OF  TAXES, 

forfeiture  of  charter  for  ,    ,  JQO 

NON-PERFORMANCE  OF  CONDITIONS  PRECEDENT, 

forfeiture  of  charter  for  160 

NON-PERFORMANCE  OF  CONDITIONS  SUBSEQUENT, 

forfeiture  of  charter  for  .   .   •   •   •  160 

677 


GENERAL  INDSXi 


disiohition  of  eoarpofttiong  to  •  •      •  •  108-150 

NOTICE, 

of  diieetora*  meeliiip   ••••••  106 

of  inflflrpigMfcop*  mpctiMBi  96 

0. 

OATH, 

of  inspectoit  of  election  108 

of  office  101 

OFFICE  66 

OFFICERS, 

of  corporations  lOT 

ONE-MAN  CORPORATIONS  13-14 

ONUS  proband:.    (See  Burden  of  Proof.) 

OEGANIZATION  MEETING  OF  INCORPORATORS, 

how  called  •  ^6 

where  held  96-98 

ORGANIZATION  OF  CORPORATIONS, 

certificate  of  109 

steps  necessary  to  complete  •••  98-99 

ORGANIZATION  TAX  84-85 

distinguished  from  franchise  tax  85 

.    graduated  85 

right  to  impose  178 

ORGANIZE, 

time  witiun  which  corporations  mnst  109-110 

OUSTER, 

judgment  of,  in  quo  vxirrarUo  proceedings    .    .    .     112-113, 157, 198 

OVERVALUATION, 

of  property  delivered  in  exchanfe  fe  tMk  122-137 


P. 


PAID  UP  STOCK, 

maaiiiiiff  of    •••••••  •••••  1^^144 

PARTNERS, 

fiability.of  InooipontoraM  •   80,173 

FAB  YALUE, 

^tugagid  in  •••••••••••••  57 

ofei^telrtoek  70 

PATENT  BIGHTS  60,121 

PAYMENT  OF  CAPITAL  STOCK  112-120 

iMrtifieiitoof  109 

in  property  120-122 


PBNAXItiJflS, 

to  Tioiatioii  oi  b3f4a;w8 

678 


OBNEBAL  INDEX. 


PENALTY, 

for  failure  to  organize  and  commence  business  110 

upon  foreign  corporations  for  transacting  business  without 

permit  195-198 

PERPETUAL  SUCCESSION, 

right  of  31-32 

PERSONAL  PROPERTY, 

power  to  hold  32-33 

PETITION  FOR  INCORPORATION,, 

synonymous  with  charter  .    •    •   11 

PLACE  OF  BUSINESS  66 

power  to  change  47 

PLEDGE, 

power  to   •  60' 

PLEDGEES, 

liabiUty  of ,  for  unpaid  stoek  aiibBcripiloiii  172 

FOUCE  POWER  160-164 

POWER, 

to  impose  organization  taxes  8S 

POWER  OF  ATTORNEY, 

signing  articles  by.  70 

POWER  OF  STATE  LEGISLATURES, 

oyer  foreign  corporations   180-164 

POWERS  OF  CORPORATIONS* 

cannot  be  <mated  by  by-law  29 

dassifieation  of  20-80 

odlateral  attack  iqpon  21,  28 

common  law  .   80^1 

consolidation  38 

express   30,  34,  36 

incidental  30,  59-60 

to  acquire  and  hold  property  in  trust  33 

to  acquire,  hold,  and  dispose  of  real  and  personal  property  .    .  32-33 

to  amend  articles  before  organization  58 

to  appoint  corporate  officers  and  agents  33 

to  appoint  executive  committee  56 

to  anthoriae  directcnrs  to  adopt  by-laws  55-56 

to  aathorize  voting  by  proxy  48 

to  bestow  npon  bondhoidsw  ijg^t  to  Toto  at  omrporate  eleotions  •  57 

to  borrow  money  60 

to  change  corporate  domioilo   47 

to  change  corporate  name  41 

to  change  corporate  purposes  46, 145-152 

to  change  number  of  directors  ••..*  46 

to  change  par  value  of  shares  57 

to  change  principal  place  of  business  47 

to  classify  directors  57-58 

to  diminish  corporate  powers  57 

to  dispose  of  corporate  assets  as  an  entirety  51-52 

679 


GENERAL  INDEX. 


POWERS  OF  CORPORATIONS— cofrfmii«l.  ■  _^ 

to  enforce  a  lien  upoa  stoek  to  leciiw  pi^BMiii  oi  cofpowle 


debts.   47-48 

to  enlarge  corporate  pofPiBi   oo 

to  ertablish  bylaws  

to  «rtoiid  oorpoMle  eiirtewt  •  • 

to  foileit  stodk   4 

to  hftH  w'^E*  ^"f^^^o^    directors  witboat  domiciliary  State .  104 

to  iaerease  or  decrease  capital  stock   41 

to  insert  provision  for  regulation  of  internal  affairs  ..... 

to  issue  preferred  stock  

to  issue  stock  in  exchange  for  services  or  property  

to  levy  assessments  *    '  ^ 

to  make  contracts    .    .    .    •  ^   • 

to  organize  subsidiary  companies  ^ 

to  perform  constituent  aets    .  .  .   •       •  •   •   '   •   •   *  • 

oi^ndeoldonudUary  State  .  ...  40 

to  permit  cnmnlative  ToliDg  ^^^^ 

to  parehMe  its  OW9  stoek  aT^s 

topiiidiMeBtookinoihMreoipontioiii  

to  sue  and  be  sued  

to  sorrander  charter  before  orfwizatioa  

to  take  property  by  devise    .    .    .    •    •  •  

to  transact  business  outside  of  domiciliary  State  w-w 

to  voluntarily  dissolve  the  corporation  «W» 

PBEFERRED  STOCK,              .   ,         ,  68 
included  in  amount  of  authorized  capital  

power  to  issue  

PEIHCIPAL  PLACE  OF  BUSINESS  ^6,  82 

FB0MOTEBS  

PROMOTION  STOCK  o^o«  '«7  «s 

PROOF  OF  COEPORATE  EXISTBNCB  24-26,  87-88 

PROPERTY   w,  w,  i^i^-x^-s 

(See  pATmHT  vom  teasss.) 

PROPORTIONATE  LXABXLITT  ^^^^^ 

PROXY,  ^  104-105 

right  to  vote  by  ^   .^g 

directors  cannot  vote  by,  at  board  meewngi        .   .   .   .   •    •  -i" 

PUBLICATIOxV,  .....  164^165,175 

of  annual  reporw  ^ 

of  articles  of  incorporation   ^ 

purpose  of  

PUBLIC  POLICY, 

corporate  purpoees  oppoied  to  .  

PURPOSES,  .g_08 
collateral  attack  upon  corporate  ^^^^ 

corporate  /  /   '  V 15-19 

for  which  corporatioBS  may  be  formed  

illegal  

680 


GENERAL  INDEX. 


PURPOSES  —  continued. 

more  than  one  purpose  19-20 

number  of  19-20 

power  to  change  corporate  ^»  145-1^ 

Q- 

QUALIFICATION  SHARES  

QUALIFICATIONS  OF  DIRECTORS  IM 

QUESTIONS  OF  LAW  AND  FACT  125 

QUORUM, 

at  corporate  elections   .  iiw 

at  stockholders'  meetings  1^ 

of  directors  

of  incorporators  ^  .    .    .    .  ^ 

QUO  WARRANTO  

RATIFICATION  ^ 

SEAL  ESTATE, 

power  to  hold  ...»  

BSASOKABLENESS, 

of  corporate  by-laws  '100 

RECORDATION, 

of  articles  of  inoorporaHoii  116-87 

RECORDS, 

ecwporate  165-167 

REDUCTION  OF  CAPITAL, 

corporate  powers  reiatiTe  to  

REGULATION, 

of  internal  al&drs  56-6^166-169 

provision  for  .  76 

of  right  of  consolidation  178-170 

REMOVAL  OF  DIRECTORS  •   •  60-61 

RENEWAL  OF  CHARTER  168-154 

REPEAL  ^100 

of  by-laws  156-164 

of  charters  *  .   .  .  .168-154 

REPORTS, 

snnnal  164-165 

legislatiTe  requirement  of  annual  164-165 

statutory  liability  of  directors  relati?e  to .   .   •   •   .   *   •   •  174-175 

RESIDENCE  OF  CORPORATIONS  W 

RESTRAINT  OF  TRADE, 

ecnnbinalions  in  .   ..............  .167-168 

RETALIATORY  TAXATION, 

of  foreign  corporations  1^ 

6S1 


GENERAL  INDEX. 


EIGHT, 

of  perpetual  roeeciion  31-32 

to  impeach  corporate  esktawe  88-92 

gpodimi  .123-125 

speeoktiTe  ^afaie  126-187 

true  Taloe  122-128 

lor  oAiiilnMtioii  of  diacler  77.73 

S. 

SEAL, 

affixed  to  certificate  of  incorporation   .   .   •  86 

power  to  adopt  and  alter  82 

use  of,  by  incorporators  79 

SECRETARY  OF  STATE, 

effect  of  oertifieate  of  due  incorporation   21-28,  88-92 

mandamus  agunst  84 

8BRYICE  OF  PROCESS, 

i^pointmoit of afent iqponwliom proeeas miqr be seryed  .  .  •  180 

SERTICES^ 

paymoit  of  atodc  in  49, 120 

SI610N6  ARTICLES  OP  INCORPORATION  78 

SIMILARITY, 

of  corporate  name  forlnddeii  14,  31 

SOLE  STOCKHOLDERS  13-14 

SPECIAL  ACT, 

meorporation  bj,  forbidden  9-10 

SPECIAL  LIABILITY  173-174 

SPECIAL  REQUIREMENTS, 

aa  to  artideb  of  incorporation  81-82 

SPECULATiyE  VALUE  RULE  125-137 

STATE, 

police  power  of  160-164 

powen  oi^  in  creation  of  corporations  10,  85 

light  of,  to  attack  corponte  iodstonoe  90-92 

repeal  eharteia  •  ^  158-164 

STATEMENT, 

of  good  faith  role   .128-125 

of  true  yalue  rule  ,   ,  122-128 

of  specnlstiTe  Talae  role  1S5-187 

STATE  OFFICERS, 

mandamus  against   84 

STATE  OFFICIALS^ 

uppraaaal  of  property  by  189-141 

power  to  accept  or  reject  artifllat    ....v.*...  ^-84 

STATUTES  OF  MORTMAIN  82 

682 


GENERAL  INDEX. 


STATUTORY  LIABILITY, 

of  directors  174-176 

of  stockholders  169-174 

STATUTORY  LIMIT, 

of  indebtedness  74-75 

STOCK, 

amount  paid  in  '72-73 

with  which  corporation  may  begin  business  73 

assessments  108-109 

capital  67-69 

extinguishment  of  37 

ftiHpaid  142-143 

issuance  of,  in  exchange  fwr  senricea  or  property  .  .  49-50, 112-137 
I^gialatiTe  aothwity  necessary  to  iaauftnce  of  .......  68 

non-assessable   141-142 

par  ¥alue  of  70 

power  of  oofporation  to  purdiase  its  own  88-87 

stock  in  oth«r  oorpoiatioiia  .  87-88 
power  to  decrease  41 

forfeit  4d-49 

increase  41 

statement  in  articles  as  to  manner  in  which  same  shall  be  paid  for  69 
STOCK  CERTIFICATES  110-111 

STOCKHOLDERS, 

double  liability  173 

exemption  in  articles  from  personal  liability    .......  75 

liability  for  debts  of  the  corporation  169-174 

labor  claims  173-174 

unpaid  stock  subscriptions  169-172 

liability  of  pledgees  172 

transferees  170 

transferors  172 

trustees  172 

■pecial  liability  178-174 

STOCK  NOTES  12I 

STOCK  SUBSCRIPTIONS, 

affidavit  as  to   81 

amount  of  70.71 

SUBORDINATE  OFFICERS  AND  AGENTS, 

appointment  of  107 

SUBSCRIPTIONS  FOE  STOCK, 

affidavit  as  to   80 

SUBSEQUENT  CONDITIONS  93,100 

SUfiSIDIABY  COMPANIES, 

power  to  oigaaizo  87 

SUE, 

power  to  84 

SURPLUSAGE,  55 

683 


SURRENDER  OF  CHARTER, 

before  orgiuiiaition  ....58, 155 

SUSPENSION  OF  BUSINESS  160, 158-150 

T. 

TAX, 

organizatum   84-85 

TAXATION, 

of  domestic  corporations  •  177-178 

TAXING  POWER, 

of  the  State  as  limited  by  the  iuter-state  commerce  clause  of  the 
Federal  Constitutioa   202-210 

TENDENCY, 

in  favor  of  incorporation   9 

TENURE  OF  OFFICE   102, 107 

TERMINATION  OF  GHABIXB   151-155 

TIME, 

of  corporate  existenee  78-74 

within  wiuch  oorponitioiit  must  onaa^  and  commeoce  Imsi- 
neM   .  .100^110 

TRADE  MARK, 

name  of  oorponilfo&  ptoteeted  aa  a  15 

TRADE  NAME, 

corporation  protected  in  equity  in  use  of  its  name  15 

TRAMP  CORPORATIONS  185 

TRANSFER, 

of  entire  corporate  aneta   51-52 

of  shares  •  171-172 

TRANSFEREES, 

liability  of,  for  unpaid  stock  aubscriptions  171-172 

TRANSFERORS, 

liability     for  unpaid  atoisk  sobaerip^oiia  171-172 

TREASURY  STOCK  121-122 

TRUE  VALUE  RULE, 

statement  of  ....    *  *  122-123 

TRUST, 

power  to  acquire  and  hold  property  in  33 

voting   103,105  . 

TRUSTEE, 

power  of  corporation  to  act  as..  83 

TRUSTEES, 

liability  of ,  fiMT  unpaid  stoek  aabferip4ioiis  172 

TRUST  FUND  DOCTRINE  114 

TRUST  LEGISLATION  167-168 

684 


GBKEilAIi  INDiaL 


ULTRA  VIRES, 

doctrine  of  'l-^ 

UNIFORM  TAXATION   86 

UNLAWFUL  CORPORATIONS    .    .   .   •   •  10 

UNPAID  STOCK  142-145 

USER  ^ 

V. 

VACANCIES, 

in  board  of  directors,  power  to  fill  •  102 

VALUATION, 

of  property  taken  in  exchange  for  stock  137-141 

VALUE,  PAR  ^  70,110-111 

VERIFIED  REPORTS  '  174 

VIOLATION  OF  EXPRESS  STATUTES, 

forfeiture  of  charter  for    .  •    •  1^ 

VISITORIAL  POWERS, 

of  State  legislatures  relative  to  corporations  164 

VOLUNTARY  DISSOLUTION   52-53,155-156 

VOLUNTARY  SURRENDER  OF  CHARTER   .......  58 

VOTING, 

cumulative   49 

by  proxy   49,  104-105 

trusts   .   103, 105 

W. 

WHAT  CONSTITUTES  DOING  BUSINESS, 

on  the  part  of  foreign  corporations  •   •   •  190-195 

WINDING  UP.    (See  DiSSOLlTTION  AND  FOKFSITUBB.) 

WORDS  AND  PHRASES  (Seajwuaa.) 


685 


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